What you pay for Medicare won't cover your costs

WASHINGTON — You paid your Medicare taxes all those years and think you deserve your money's worth: full benefits after you retire.

Nearly three out of five people say in a recent Associated Press-GfK poll that they paid into the system so their benefits shouldn't be cut.

But a newly updated financial analysis shows that what people paid into the system doesn't come close to covering the full value of the medical care they can expect to receive as retirees.

"The fact that you put money into the system doesn't mean it's there waiting for you to collect," said Eugene Steuerle of the Urban Institute think tank.

Many workers may believe their Medicare payroll taxes are going for their own insurance after they retire, but the money is actually used to pay the bills of seniors currently on the program.

That mistaken impression complicates the job for policymakers trying to build political support in coming months for dealing with deficits that could drag the economy down.

Health care costs are a major and unpredictable part of the government's budget problems, and Medicare is in the middle. Recent debt reduction proposals have called for big changes to Medicare, making the belt-tightening in President Barack Obama's health care law seem modest. Some plans call for phasing out the program, replacing it with a fixed payment to help future retirees buy a private plan of their choice.

Peel back the layers, and there are several reasons why Medicare benefits and taxes are so out of line. First, the rapid rise in health care costs.

A single woman who retired in 1980, after earning average wages throughout her career, could expect to receive medical care worth about $74,800 over the rest of her lifetime. A comparable woman retiring in 2010 can expect services worth $181,000. Those numbers are in 2010 dollars, adjusted for inflation so they can be compared directly.

Another reason is that payroll taxes cover most, but not all, of Medicare's costs. They are earmarked for the giant trust fund that pays for inpatient care.

Outpatient doctor visits and prescription drugs are paid for with a mix of premiums from collected from beneficiaries and money from the government's general fund. Seniors pay only one-fourth of the costs of those benefits through premiums.

The system has worked for 45 years, with occasional fine tuning. But the retirement of the baby boomers, the first of whom become eligible for Medicare in 2011, threatens to push it over the edge. Medicare covers 46 millions seniors and disabled people now. When the last of the boomers reaches age 65 in about 20 years, Medicare will be covering more than 80 million people. At the same time, the ratio of workers paying taxes to support the program will have plunged from 3.5 for each person receiving benefits currently, to 2.3.

Medicare's numbers

. $89,000: The amount an average-wage, two-earner couple makes a year.

. $114,000: The total they will have paid into Medicare if they retire in 2011.

. $355,000: The sum they can expect to receive in all Medicare services.

vs. Social Security's

. $89,000: The same average couple's annual income.

. $614,000: The sum they will have paid in Social Security taxes if they retire in 2011

. $555,000: The sum they can expect to collect in benefits.

Source: Urban Institute

What you pay for Medicare won't cover your costs 12/30/10 [Last modified: Monday, November 7, 2011 1:51pm]

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