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 Retirement Benefits to Average Workers' Wages and Total Compensation
Since workers bear most of the cost of funding Social Security and Medicare benefits, it is revealing to compare Social Security and Medicare spending per senior to the earned incomes of average workers.
"Average Medicare benefits are a growing percentage of average workers' wages."
Average Net Federal Benefits versus the Average Worker's Wage. The average wage used in these comparisons is representative of average earnings in the economy. It includes wages in employment covered by Social Security, wages earned by the 6 percent of workers not covered by Social Security and wages above the taxable maximum.11
"Social Security benefits per retiree will decline as a percentage of average workers' wages."
Figure III presents the net benefits received by retirees as a percentage of average wages. The lower line in Figure III shows average net Social Security benefits received by retirees as a percentage of the average wage.12 In 2006, the average net Social Security benefit paid to retirees is expected to be about 29 percent of the average worker's wage. The percentage is projected to decline slightly due to reductions in payments to early retirees that were implemented as part of the 1983 reforms and to higher taxes on Social Security benefits as retirees' incomes rise. For example, by 2080 the average after-tax Social Security benefit will be 26.5 percent of the average worker's wage.
The upper line in Figure III presents Social Security and Medicare benefits combined. While Social Security benefits per retiree are declining relative to average wages, average Medicare benefits are rising.13 In 2006, average after-tax Medicare benefits are expected to equal 22 percent of the average worker's wage. They are expected to rise to 27 percent over the next 20 years and to 37 percent by midcentury.
- Average after-tax Social Security and Medicare benefits combined equaled 51 percent of average earnings in 2006.
- By the time the last of the baby boomers retire in 2032 combined benefits will equal 56 percent of average wages.
- By midcentury, they will rise to 63 percent and by 2080 they will exceed 70 percent of average wages.
Average Net Federal Benefits versus the Average Worker's Total Compensation. Figure IV compares Social Security and Medicare benefits to total compensation:
- Combined average after-tax Social Security benefits and average Medicare benefits, net of premium payments, are expected to equal 41 percent of workers' average total compensation in 2006.14
- By the time the last of the baby boomers reach retirement age — in 2032 — combined average benefits are projected to grow to 43 percent of workers' average compensation.
- By midcentury, combined benefits will equal 47 percent of average compensation and will equal almost 49 percent by 2080.
"Combined benefits represent a growing share of average workers' total compensation."
Average Net Federal Benefits versus Net Average Compensation. The rising taxes needed to support Social Security and Medicare spending will reduce workers' after-tax compensation and potential consumption. Thus, a final comparison is needed to account for the growing tax burden necessary to support promised benefits.
Figure V shows average net retiree benefits relative to average after-tax compensation over time.15 The average Social Security benefit per retiree is currently about 30 percent of workers' average compensation; adding Medicare benefits increases the transfers.
- Average combined benefits are expected to be about 53 percent of average after-tax compensation this year.
- They will grow to 58 percent of workers' average after-tax compensation when the last of the baby boomers reach retirement age in 2032.
- They will rise to 65 percent in 2050 and to more than 69 percent of average after-tax compensation by 2080.
Thus, using this more restrictive measure of potential consumption, Social Security and Medicare transfers to the elderly will grow from just under half of workers' average total compensation to more than two-thirds under current law. Policymakers might want to consider the fairness of taking more and more of workers' paychecks to fund benefits to retirees equal to almost 70 percent of what the workers earn.