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In 1994 the youth advocacy group Third Millennium commissioned a poll that is still widely quoted. One of the questions found that more members of Generation X (ages 18 to 34 at the time) believed in UFOs (46 percent) than thought that Social Security (9 percent) would be solvent when they started to retire around 2030. But even if Social Security is around when Gen Xers finally stop working, they will discover that they have put far more into the system than they will be taking out.
Last year C. Eugene Steuerle and Stephanie Rennae, researchers at the liberal Urban Institute, calculated what Americans at various levels of income (high, average, and low) and in various types of households (single or married) can expect to pay into and receive from Social Security and Medicare over the course of their lifetimes. For Social Security, the calculations assumed that individuals retire at the age when full benefits kick in (originally 65 but rising past 67 under current law) and that Medicare payments start at 65. The main findings are both highly informative and deeply dispiriting.
Consider the Social Security numbers first. A single man earning the average wage ($43,500 in 2011) who retired in 1980 would have paid a total of $96,000 in Social Security taxes and received lifetime benefits of $203,000, or about 211 percent of contributions. A single man earning the average wage but retiring in 2010 faces a vastly different situation: He would have paid $294,000 in taxes to receive benefits of just $265,000, or about 90 percent of contributions. For the same person retiring in 2030, taxes of $398,000 yield $336,000 in benefits, or just 84 percent of contributions. (Because they tend to live longer, women fare slightly better than men, but single women earning the average wage and retiring in 2010 and 2030 also face negative returns on their lifetime tax contributions to Social Security.)
The calculations for Medicare underline the point that everybody is getting more out of the program than they are paying in. Consider a single woman earning the average wage who turned 65 in 1980. She has paid in $8,000 but will take out $81,000 in benefits, or more than 10 times her contribution. The same woman turning 65 in 2010 will have paid $58,000 in taxes to receive $185,000 in benefits, or a threefold return. A single woman retiring in 2030 will have paid $87,000 to get $275,000.
Medicare is notoriously ineffective at containing costs. Champions of the program like to note that it has lower administrative costs as a percentage than most private insurance plans, but they routinely ignore at least two other points that explain why overall costs continue to spiral upward. First, Medicare wastes a lot of money on procedures that have no impact on patients. As a 2009 report by President Obama’s Council of Economic Advisers, then chaired by Christina Romer, put it, “Nearly 30 percent of Medicare’s costs could be saved without adverse health consequences.” Second, Medicare reimbursement rates to providers have proven politically impossible to cut. In 1997 Congress created “the sustainable growth rate,” which tied what the government would pay for particular procedures to rates of inflation. The reimbursements went up steadily for several years until 2002, when the rate of increase in rates slowed slightly—not an actual cut, mind you, merely a decrease in the rate of increase. Since then, doctors have managed to muscle through what has become known as the “doc fix”: ongoing “temporary” increases in reimbursement rates. No one seriously thinks that reimbursement rates will be trimmed anytime soon.
Social Security and Medicare thus present twin horns of a dilemma. The retirement entitlement offers nothing but negative returns for future beneficiaries, whose taxes in the meantime will need to be raised to cover current beneficiaries. And the health entitlement’s costs have proven resistant to all forms of price control, meaning the system will either chew up a larger share of federal spending at the expense of other outlays, go bust, or rely on larger and larger tax levies on today’s younger workers.
Old vs. Young
Social Security and Medicare were created in a very different America as a response to very different circumstances. The old-age entitlements were designed to alleviate problems related to an economy still in transition from rural agriculture to urban manufacturing and post-industrial services. Private pensions and retirement savings were relative rarities, and the communitarian dream of multiple generations living under the same roof—invoked as an ideal by some of the very people, such as Joe Biden and Hillary Clinton, who champion old-age entitlements as a means of “independence” for seniors—was a routine necessity.
That’s no longer the case in a country where most retirees are wealthier than the younger people paying for their benefits. According to 2010 data (the latest available) from the Bureau of Labor Statistic’s Consumer Expenditure Data, the typical American 65 or older had a pretax income of about $41,000 and annual expenses of about $37,000, including $4,800 for all medical care costs they bear under the current regime (insurance, prescription drugs, doctor’s visits, etc.). Those who can pay for their needs out of their own pockets should do so, not only in the name of fiscal sanity and generational fairness but because the U.S. health care system suffers mightily from a lack of pricing signals and consumer self-control.
We must reform the current system, starting now. The most obvious, effective, and just approach is to end Social Security and Medicare and replace them with a true safety net that would help poor Americans regardless of age. To the extent that seniors qualify for income supplements, food stamps, and other transfer programs, they should be added to those rolls. They can also be added to Medicaid rolls (currently about 9 million seniors are so-called double-dippers, receiving benefits from both Medicaid and Medicare). There is no reason to have separate programs for the elderly and the poor when the real distinction should be not age but ability to pay. Payroll taxes, the most regressive taxes on income, should be scrapped, freeing up huge amounts of money for Americans of all ages to spend and save as they see fit. As Americans start to think seriously about saving for their retirements, long-term investment will boom, and so will insurance planning; generations will be forced to recognize that they are connected not via impersonal and punitive payroll taxes but through shared assets and household expenses.
The popular counter-argument—that current and future beneficiaries have paid into these systems and are thus “entitled” to Social Security and Medicare— holds no legal or moral water. In the 1960 case Flemming v. Nestor, the Supreme Court ruled that, contrary to the rhetoric surrounding Social Security, the program is not an actual retirement system in which participants maintain legal claims to the contributions they’ve made or the assets they’ve accrued. While it is terrifying for all of us to consider losing the money we’ve paid into Social Security, the fact is that we already have. It makes no moral sense to string along a program that winds up screwing even recent beneficiaries as measured by money in vs. benefits out. And as for Medicare, there is something wrong with perpetuating a system that doles out scarce tax dollars to recipients regardless of need. Old-age entitlements aren’t a problem to be adjusted; they are a blot to be thoroughly mopped up.
The technical details and transition times for a post-entitlement country are less important than a basic principle that should appeal to conservatives, liberals, and even many libertarians: Federal aid programs should be means-tested. The welfare reforms of the 1990s provide a model. Rather than create and oversee expansive projects from afar, the federal government started sending nonmatching block grants to the states, which were given more freedom to set their own requirements and more flexibility to try out approaches tailored to their specific needs and circumstances. When the federal government gives matching grants, it creates an incentive for states to increase spending on programs regardless of effectiveness (as happens currently with Medicaid, where Washington pays about 60 cents out of every dollar spent on the program as spending rages out of control).
It is hard to know which is more depressing: the punishing and sure-to-rise price that younger Americans are forced to pay for a system that steals from the relatively poor to give to the relatively rich, or the smugness with which champions of this patently unfair system insist on its righteousness. In his March speech in Florida, Vice President Biden told stories of building a new house that included living quarters for his parents, who refused to move in. Biden explained that his parents and other seniors value their “independence” and “dignity” more than anything. His mother, he said, was representative of seniors in that she wanted to be able to pay her own way at check ups with her doctor. “She didn’t want to ask her kids.”
In Biden’s strange moral universe, his mom should be admired for wanting to get medical care on the dime of strangers rather than from her own family. The vice president was trying to defend old-age entitlements, but his example is the quintessence of what is wrong with the current system: It gives to those who already have much by taking from those who have little.
Back in 1964, the last year of the baby boom, Bob Dylan warned: “There’s a battle outside / And it is ragin’ / It’ll soon shake your windows / And rattle your walls.” Born in 1941, Dylan has been receiving Social Security and Medicare—both programs have mandatory enrollment—for at least four years now. In 1964 he was singing to a very different America with very different concerns. But his song of generational war, so prophetic in its day, may well prove prescient again.
Nick Gillespie is editor in chief of reason.com and reason.tv. He is co-author with Matt Welch of The Declaration of Independents: How Libertarian Politics Can Fix What's Wrong With America, just out in paperback (Public Affairs). Contributing Editor Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.