How Generous Are Social Security and Medicare?
Friday, October 27, 2006
by Andrew J. Rettenmaier & Thomas R. Saving
Table of Contents
- Executive Summary
- Comparing Retirees' Social Security Benefits to Their Average Lifetime Wages
- Wage Indexing versus Price Indexing
- Adjustments for Health Care and Taxes
- Comparing Social Security and Medicare Replacement Rates over Time
- Comparing Retirement Benefits to Average Workers' Wages and Total Compensation
- About the Author
Comparing Social Security and Medicare Replacement Rates over Time
Social Security and Medicare will replace a growing share of preretirement price-indexed wages for future groups of retirees. As Figure II shows:
- Social Security, net of taxes, and Medicare, net of premiums, will replace almost 90 percent of average annual price-indexed earnings for workers born in 1945.
- For workers born in 1960 (retiring in 2027), elderly entitlements are projected to replace 100.9 percent of average wages.
And as Table IV indicates, Social Security and Medicare will replace more than 100 percent of the average preretirement purchasing power of future retirees when compensation net of federal labor taxes is considered. As a result, projected government benefits alone — not including pensions and personal savings — will provide today's middle-aged workers, on the average, higher annual potential consumption in their retirement years than before retirement.
Much of the rise in replacement rates will be due to the growth in Medicare benefits. For average retirees:
- Medicare's replacement rate will grow more than 40 percent over the next 20 years; while it currently replaces over one-third of preretirement consumption for new retirees, it will replace about half for workers retiring in 2027.
- Today, Medicare's replacement rate equals 70 percent of Social Security's for new retirees but will almost equal Social Security for workers retiring in 2027.
Beyond 2036, Medicare benefits for average workers will be greater than Social Security benefits.