Patrick Appel at the Daily Dish picks up on yesterday’s post showing that most seniors will receive significantly more in Medicare benefits than they ever paid in Medicare taxes, undercutting the claim—coming from Republicans, believe it or not—that President Obama’s proposed Medicare cuts are unfair to seniors, who have “paid for their benefits.” (E.D. Kain also weighs in.)
Appel raises the good point that the figures I presented yesterday are only for someone who actually survives to retirement age. “Senior citizens can get slightly more out of Medicare than they put in while not bankrupting the country because many workers will not live long enough to collect payments.” That’s true. But how big an effect does it have?
To check, I effectively repeated my prior calculations, but on a mortality-adjusted basis. That is, I start with a person who is 21 years old. I then construct a stream of taxes through age 64 and Medicare benefits from age 65 through 100. Each dollar figure is then multiplied by the probability of being alive at that age. Taxes at age 22, for instance, are multiplied by 0.999, since there’s a near certainty that a 21-year-old will live to age 22, but benefits at age 95 are multiplied by only 0.08, since there’s only around an 8 percent chance that a 21-year-old will survive to age 95. These mortality-adjusted taxes and benefits are then converted to present values to account for interest.
What’s the result? The typical 21-year-old as of 1965 would have paid around $62,290 in Medicare taxes (versus $64,470 on a non-mortality adjusted basis) while receiving around $140,346 in benefits (versus $173,886 on a non-mortality adjusted basis). So Appel’s point clearly has merit.
That said, the broader point still stands: in my original calculations, a new retiree in 2009 would have paid Medicare taxes equal to around 37 percent of his expected benefits. Adjusted for the chance of dying before retirement, that share rises to only 44 percent. So even with reasonable adjustments for mortality, the typical retiree today has paid for less than half the Medicare benefits he can expect to receive over his lifetime. Importantly, rising life expectancies will tend to increase benefits more than taxes, making today’s deal better over time.
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