How Generous Are Social Security and Medicare?

Studies | Federal Spending | Health | Social Security

No. 290
Friday, October 27, 2006
by Andrew J. Rettenmaier & Thomas R. Saving


Introduction

This paper examines the size of elderly entitlements in several revealing ways. It identifies the degree to which Social Security and Medicare benefits replace preretirement income and consumption for new retirees and illustrates the relative growth in benefit payments to future retirees.1 Social Security replaces about 40 percent of earnings for average workers based on Social Security Trustees Report estimates.2 But workers' preretirement earnings are not the right target. If the real goal is to maintain consumption during retirement at levels comparable to consumption before retirement, earnings are not a good measure; potential consumption is better. By one measure, Social Security currently replaces more than half of preretirement consumption for the average worker. Social Security and Medicare together replace more than four-fifths of preretirement consumption for average retirees today, and that replacement rate will grow even larger over time.


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