Payroll Taxes Fall Short of Paying for Social Security and Medicare
In a recent New York Times opinion piece which keyed off a recent analysis from Karen Smith and Committee for a Responsible Federal Budget board member Eugene Steuerle, Glenn Kramon and Steuerle explain that the aging of the population and growing cost of benefits are putting the Social Security and Medicare trust funds in jeopardy.
With 17 percent of the population now over 65 (up from only 12 percent three decades ago) and the Social Security and Medicare programs paying most seniors far more than they paid in, the authors argue that For the Good of the Country, Older Americans Should Work More and Take Less. As they write:
"We older Americans are not only controlling national politics; we are consuming an ever larger share of our economy’s resources through programs like Social Security and Medicare, leaving younger Americans to foot growing bills for their parents’ and grandparents’ retirements. And politicians of both parties are refusing to recognize the consequences."
Core to their argument is the fact that most seniors will collect far more in Social Security and Medicare benefits than they paid in. Research from Steuerle and Smith shows this to be true across incomes and marital status – assuming Social Security pays full scheduled benefits rather than deep cuts upon insolvency.
For example, the average-earning dual-income couple retiring in 2025, will receive 32 percent more in benefits than the Social Security and Medicare taxes paid over a lifetime. The average single-earner couple will receive 62 percent more in benefits than they pay in taxes. And that disparity will worsen over time – the same couples retiring in 2055 will receive 44 percent and 69 percent more than they pay in, respectively. Indeed, an average-earning dual-income couple retiring in 2055 will receive nearly $2.5 million in benefits (in today’s dollars), compared to the $1.4 million they pay in taxes.
This same pattern holds across the income spectrum, though with some differences. For example, a low-income single-earning couple retiring in 2055 will get 83 percent more than they pay in, while a high-income single-earning couple will get 57 percent more.
This disparity, in combining with the growing number of seniors and stagnant growth of workers, is driving Social Security and Medicare toward insolvency and raising the cost of both programs. According to their Trustees, the Medicare Hospital Insurance trust fund will be insolvent by 2031 and the Social Security trust funds by 2034. And CBO estimates the combined cost of Social Security and Medicare – which has already grown from 5.9 percent of GDP in 2000 to 8.2 percent today – will further grow to 11.7 percent of GDP by 2053.
Addressing this disparity and restoring solvency will likely require some combination of higher revenue and slower benefit growth, and more efficient delivery of health care. Our Social Security Reformer tool allows users to design their own plan.
But Steuerle and Kramon point out that encouraging delayed retirement can also help. As they write:
"When President Franklin D. Roosevelt signed Social Security into law in 1935, the age to qualify for Old-Age, Survivors and Disability Insurance was 65. Back then, most of those at that age were poor and lacked health insurance. And many jobs were more physically demanding…
"Today many 65-year-olds are healthy enough to live independently, play golf or pickleball daily and travel far and wide… For a typical 65-year-old couple, at least one partner, on average, will likely make it to 90 or beyond. Yet even as life expectancy has risen since 1935, the minimum age to qualify for at least a portion of your Social Security benefits has fallen to 62. That means that many people are now drawing from Social Security for as much as a third of their adult lives, if not more. If people took the same number of retirement years as the average person retiring in 1940, they would stop working at around 77."
The authors then discuss ways to reform Social Security, Medicare, and other policies to encourage delayed retirement. This includes increasing the retirement age, offering full Medicare benefits to those over 65 that stay in the workforce, and modifying pension and tax rules.
As we’ve written before, delayed retirement can boost household wealth and retirement income, lead to better physical and mental health, improve life expectancy, and strengthen social networks, among other benefits. Delayed retirement can also grow the economy and boost national income growth. This is on top of the solvency benefits of raising the Social Security retirement age and other reforms.
Of course, there are many other alternatives to saving Social Security. But doing nothing to the retirement fund should not be one – as it would result in a 23 percent across-the-board benefit cut in just 10 years, upon insolvency. That’s $17,400 per year for a typical couple retiring that year. The sooner we act to avoid these cuts, the better.
As Steuerle and Kramon conclude:
"Younger Americans must help lead this transformation because every year reform is delayed, they and future generations will receive less support during their working and child-raising years. Just as their parents and grandparents did on important issues, it’s time for them to speak out and step up."