How Generous Are Social Security and Medicare?

Policy Reports | Federal Spending | Health | Social Security

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

Comparing Social Security and Medicare Replacement Rates over Time

Figure II - Social Security and Medicare as Percentages of Preretirement Price-Indexed Wages

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.
Table IV - Social Security and Medicare Replacement Rates with Price Indexing for Average 65-Year-Old Retirees and 42-Year-Old Workers

Beyond 2036, Medicare benefits for average workers will be greater than Social Security benefits.

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