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


Conclusion

Figure V - Social Security and Medicare Spending per Retiree as a Percentage of Average Compensation%2C Net of Taxes

"Combined benefits are growing in comparison to average total compensation, net of payroll taxes."

Without changes, Social Security and Medicare will grow relative to the earnings and compensation of the workers who fund the programs. Further, the rate at which these entitlement benefits replace preretirement earnings of successive cohorts of retirees will rise. By the time today's teenagers retire, net Medicare and Social Security benefits will rival their average preretirement price-indexed wages.

"Projected benefit levels are not sustainable."

Implied replacement rates of 100 percent of retirees' own preretirement earnings and ever-growing transfers to retirees relative to taxpayers' own earnings may seem implausible, but they are derived from the projections in the Trustees Report. These projections assume no legislative changes in response to growing burdens; rather, they illustrate the implications of continuing currently legislated programs. These estimates also assume that scheduled and projected benefits will actually be paid to beneficiaries and that they will be financed with the current statutory payroll taxes, taxes on benefits and general federal revenues. Further, the projections assume that the growth in the size of government will not affect the rate of economic growth. The magnitude of the transfers implied, compared to the beneficiaries' own lifetime earnings, and compared to the earnings and compensation of the workers who are paying the benefits, suggests that the programs are not sustainable as designed.

NOTE: Nothing written here should be construed as necessarily reflecting the views of the National Center for Policy Analysis or as an attempt to aid or hinder the passage of any bill before Congress.


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