Social Security and Medicare: Do you get back what you pay in?

People who pay into Social Security and Medicare their whole working lives are often told by politicians that they've 'earned' these retirement benefits. Here's why that's not necessarily so.

Are Social Security and Medicare “earned entitlements,” returning benefits for which recipients have already paid?

The question arises because earlier this week House Budget Committee Chairman Paul Ryan (R) of Wisconsin said they are. Appearing on Laura Ingraham’s radio show on Jan. 22, Representative Ryan said President Obama had mischaracterized the GOP’s attitude toward the nation’s big social insurance programs.

“No one is suggesting that what we call our earned entitlements – entitlements you pay for, like payroll taxes for Medicare and Social Security – are putting you in a ‘taker’ category,” said Ryan. “No one would suggest that whatsoever.”

Of course, Ryan is far from the only politician to describe Social Security and Medicare in this manner. The wording may be more common among Democrats, who often imply that these programs are simply keeping folks’ tax cash warm until they need it – so hands off!

Let’s quote Mr. Obama himself from an appearance last September before an American Association of Retired Persons audience: “I want to emphasize, Medicare and Social Security are not handouts. You’ve paid into these programs your whole lives. You’ve earned them.”

To this we say, weelllll, not really. The situation is more complicated than that.

It’s true that workers fork over Social Security and Medicare taxes every payday. But under current law, over their lifetimes most Americans will get back substantially more from these programs then they’ve paid in, even after accounting for inflation and adjusting for interest you might have earned if you’d kept the money.

That’s primarily due to the rising value of projected Medicare health benefits. Social Security is a different story. In recent years the raising of the Social Security retirement age, plus other tweaks, have made the big retirement income entitlement less generous. New retirees won’t get back quite as much income support as they’ve contributed in Social Security taxes.

However, individual tax/benefit ratios for both programs are highly variable, depending on lifetime earnings, longevity, marital status, and health conditions.

Got all that? We weren’t kidding when we said it was “complicated.”

Numbers might better illustrate these points. At the Urban Institute, C. Eugene Steuerle and Caleb Quakenbush have been studying these issues for some time. According to their updated 2012 figures, a single male earning the average wage who retired in 2010 will receive total lifetime Social Security and Medicare benefits worth $457,000, following total lifetime tax contributions of $361,000. So he’ll be $96,000 in the black.

Such a person who retires in 2020 would be $109,000 in the black. A 2030 retiree would get back $156,000 more than he put in. So, as things stand at the moment, retirees will get increasingly generous transfer payments from working taxpayers as the decades roll by.

The trend line is even better for a two-earner average-wage couple. If they retired in 2010, they’ll get back $244,000 more in benefits than they contributed in taxes. Such a couple who retires in 2030 would be $379,000 to the good.

But again – maybe we can’t emphasize this enough – the apparent largesse on the part of Uncle Sam is largely a result of the rising cost of Medicare, which in turn is driven by health-care cost inflation.

The single male of average earnings who retired in 2010 is projected to get back three times as much in Medicare benefits as he contributed in taxes, for instance. The working couple will reap the same benefit/tax ratio.

This should not be surprising. The rising cost of health care in general is one of the most important fiscal problems facing the United States. Medicare is only one aspect of this, albeit a big one.

“The path of health care spending for seniors relative to taxes and premium revenues is unsustainable in the long run,” write the Urban Institute’s Mr. Steuerle and Mr. Quakenbush in a study of Medicare lifetime benefit calculations.

Until recent years, Social Security was in the same boat, actuarially speaking. Recipients often received much more in income support benefits than the value of the Social Security taxes they’d paid.

For example, workers with average wages who retired at age 65 in 1980 got back both the employee and employer share of Social Security contributions, plus interest, in only 2.8 years, according to a Congressional Research Service study of the subject.

A similar person who retired in 2003 will have to wait 17.3 years before getting that money back, according to CRS.

“For those retiring in 2020 it will take 21.6 years,” writes CRS analyst Dawn Nuschler.

In large part this increase is due to a package of reforms meant to stabilize Social Security’s finances that passed Congress in 1983. Among other things, lawmakers voted to raise the program’s retirement age from 65 to 67. That’s being phased in now. The full two-year increase will affect people born in 1960 or later.

The bottom line: New retirees already on average will get back less from Social Security over their lifetimes than they’ve put in. The Urban Institute’s prototypical single male earner, if he retired in 2010, will have paid $46,000 more to Social Security then he’ll see in benefits. The two-earner average couple? In regards to government-provided social insurance, the Urban Institute projects they’ll end up $105,000 in the red.