NCPA - National Center for Policy Analysis


October 27, 2006

Social Security and Medicare benefits are more generous than commonly thought, and benefits paid to seniors are projected to grow rapidly over time.  Unfortunately, this growth in benefits will likely prove to be unsustainable.  Policymakers must consider ways to control the growth in federal entitlement spending before it swamps the entire federal budget, say Andrew J. Rettenmaier and Thomas R. Saving of the Private Enterprise Research Center.

The government replaces 85.3 percent of price-indexed preretirement "consumable income" for the average worker.  Looking to the future, the replacement rate will rise over time:

  • For workers who are 46 years old today, elderly entitlements will replace 105.3 percent of price-indexed average preretirement compensation, net of federal labor taxes.
  • As a result, today's middle-age workers will, on the average, consume more during an average year in retirement with government benefits alone (not including pensions and personal savings) than before retirement.

Since Social Security's replacement rate for preretirement earnings will remain relatively constant over time, almost all of the increase in replacement rates is due to Medicare.  In fact, Medicare's replacement rate will rise dramatically, say Rettenmaier and Saving: 

  • Medicare's replacement rate will grow over the next 20 years, from 37 percent of preretirement earnings for new retirees today to about 48 percent by the time today's 46-year-old workers retire, based on current projections. 
  • Although Medicare's replacement rate equals 70 percent of Social Security's rate for new retirees, it will equal 90 percent for workers retiring in 2027.
  • For workers younger than age 37, Medicare benefits are projected to be larger than Social Security benefits, on the average.

Source: Andrew J. Rettenmaier and Thomas R. Saving, "How Generous Are Social Security and Medicare?" National Center for Policy Analysis, Policy Report No. 290, October 27, 2006.

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