Medicare Taxes: Getting Your Money's Worth

Saturday, 15 January 2011

A recent poll by the Associated Press shows that 6 out of 10 Americans expect to receive the full amount of the Medicare taxes they paid in, when they retire. American's believe they are entitled to their full benefits without any cuts. However, new analysis shows that the amount people pay into the system will not cover what they will receive in benefits when they retire. The actual benefit amount they will receive will be about three times the amount put in.
Analysis shows that someone earning on average $89,000 per year and retiring in 2011 will have paid $114,000 in Medicare taxes during their working years. The amount they will receive in Medicare benefits during retirement, including all health care, will be approximately $355,000.
These estimates were calculated at the Urban Institute think tank by Eugene Steuerle and Stephanie Rennane. They illustrate that there is a large gap between the expectations of Americans and the actual Medicare amounts. They may be concerned about Medicare's long-term future and financing, but they do not realize just how large the gap is. Eugene Steuerle states, "The fact that you put money into the system doesn't mean it's there waiting for you to collect".
American workers believe that the amount they pay into Medicare will be used for their benefits after they retire. Actually, the money received now is used to pay for seniors currently covered under Medicare. This disconnect makes the job of policymakers more difficult when trying to build political support when dealing with Medicare deficits.
Social Security taxes and their future benefits are actually coming close to balancing. The same person earning $89,000 and retiring in 2011 will have paid in $614,000 in Social Security taxes. During retirement this person will collect benefits in the amount of $555,000. There is a 10 percent difference in what was paid in and the benefits paid out.
The Urban Institute's focus is on budgeting and economic issues. Their financial estimates are periodically updated and their analysis is accepted by policy makers and others in Washington. The intent of the estimates is to try and show the average taxpayer the complicated finances of Medicare and Social Security in a format that they can understand.
Medicare has become stuck in the middle of the government's budgeting problems. Health care costs are unpredictable and very expensive, which makes the budgeting process much more complicated. There have been some proposals made for major changes in the Medicare system. Some of the plans even call for replacing the Medicare system with fixed pricing so people can purchase their own health plans.
There are many reasons for the extreme discrepancies between what is paid in and what is paid out in Medicare benefits. The continuing rise in health care costs is the first reason.
A single person who retired in 1980 will receive about $74,800 in medical benefits during their retirement period. However, someone retiring in 2010 will receive medical benefits worth $181,000 during their retirement. These amounts were adjusted for inflation showing the extreme difference in health care costs.
The second reason is that the amount paid into Medicare by payroll taxes does not cover all of the costs. This money goes to a trust fund set up to pay inpatient care benefits. Outpatient visits and prescription costs are paid from a mix of resources. These visits are covered by premiums paid from beneficiaries and from a general government fund. Only one-fourth of health care benefits are paid by seniors through their premiums.
The third reason is the retirement of the baby boomers. The first of the baby boomer generation will become Medicare eligible in 2011. This may push Medicare over the edge. Currently there are 46 million seniors and disable people covered by Medicare. In about 20 years, the remaining baby boomer population will reach retirement age and Medicare will then be covering over 80 million people.
During this same time period, the ratio of workers paying taxes to support Medicare will plunge. Currently the ratio is 3.5 to one but in 20 years the ratio will be 2.3 to one. Eugene Steuerle states that we cannot continue, "shoving all those costs to future generations...we know that this system is totally unsustainable."

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