Will there Be Social Security Left for You? Inequity in Entitlement Payouts


NEW YORK (MainStreet) -- According to a recent report by the Congressional Budget Office (CBO), different generations have paid and will continue to pay disparate amounts of Medicare and Social Security payroll taxes, and they will also receive dissimilar amounts of Medicare and Social Security benefits during their lifetime.

Later generations are projected to receive higher Medicare benefits than current recipients. This is primarily the result of the fact that health care spending on a per person basis will increase and also because life expectancies will continue to increase.

Social Security benefits are also expected to be higher for later birth cohorts because of this increased life expectancy. The CBO explained that payouts will be higher, because "real earnings generally grow over time." As a result "payroll taxes will be higher for later cohorts because of that growth in real earnings."

The CBO estimated the inflation-adjusted lifetime benefits and payroll taxes for various birth cohorts, and ultimately what they pay in and what will be paid out to them. (The payroll taxes are 2.9% of all taxable earnings, plus, beginning in 2013, an additional 0.9% tax on earnings over $200,000 for single taxpayers and $250,000 for married couples.)

According to the CBO's projections, over their lifetime, "beneficiaries born in the 1940s would, on average, receive about $160,000 in benefits (net of premiums paid) and pay about $45,000 in payroll taxes (both figures are expressed in 2013 dollars). Those born in the 1950s would receive, on average, about $205,000 in benefits and pay about $60,000 in payroll taxes, CBO estimates. And those born in the 1960s would receive, on average, about $270,000 in benefits and pay about $65,000 in payroll taxes."

Medicare beneficiaries, in each cohort, would also pay other taxes to the federal government over their lifetime, and a portion of those other taxes would be used to finance Medicare benefits—but it would be difficult to delineate and itemize these amounts.

When it came to Social Security, the CBO estimated that over their lifetime, beneficiaries born in the 1940s would, on average, receive about $190,000 in benefits while paying about $205,000 in payroll taxes. Those born in the 1960s would, however, receive $240,000 in benefits and pay $245,000 in payroll taxes.

But those born in the 1980s get paid more out than they put into the program. Ironically, those born before the 1940's got out more than they put in too.

The 1980s cohort "would, on average, receive $310,000 in benefits and pay $260,000 in payroll taxes."

For workers born from the 1940s through the 1980s, taken all together, lifetime payroll taxes would be roughly equal to lifetime benefits. But benefits for earlier generations were considerably larger than their payroll taxes, and that historical imbalance contributes to the system's ongoing financial shortfall. (Because Social Security benefits are more predictable than Medicare benefits, the CBO has extended its projections for Social Security further into the future.)

Yevgeniy Feyman, a fellow at the Manhattan Institute who writes about health care policy, entitlement reform and the Affordable Care Act, has directed his latest research toward the national physician shortage and the costs of health care reform.

"What they are talking about earlier generations were those who became eligible before the 1940s," he said of the CBO's findings. "The program started off with an unfunded liability. But reforms are going to be needed in the future."

The first simple reform he mentioned was to tie all entitlement programs to the chain CPI. This is what the Obama administration already proposed. The chain CPI allows for some switching of the basket goods. So, for example, if the price a steak goes up people switch to chicken and the chain CPI reflect this. Making the change to a chain CPI would reduce Social Security expenditure by $127 billion.

An alternate plan is an immediate increase in the payroll tax. Increasing Social Security payroll tax by 3.5 to 4 percentage points would make Social Security solvent. Another reform is means testing of Social Security and Medicare.

It is worth noting that Ross Perot proposed this when he was a candidate for president in 1992. Very few took him seriously then. Right now there are inherent inequities in both Social Security and Medicare. So they are a kind of wealth redistribution program.

"If you are looking at the Social Security replacement rate, it is 40%," said Feyman. "People with lower income are replacing a larger percentage of their income with Social Security payments than wealthier people."

The youngest cohort will be affected the most by entitlement program reforms.

"People who are born in the 1990s will either have to reduce their benefits or increase their contributions," said Feyman.

--Written by Michael P. Tremoglie for MainStreet

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