U.S. Budget Watch: How Much Are Medicare Benefits "Paid For"?

As the presidential campaigns have turned their attention to Medicare (which we analyzed two weeks ago), each one frames the issue as protecting Medicare benefits that past and present American workers have paid for. The Obama campaign states, "You work hard, pay in, your Medicare benefits are guaranteed." The Romney campaign proceeds similarly, "You paid into Medicare for years. Now you need it."

Neither campaign goes so far as to say that American taxpayers pay in full for their Medicare benefits. Still, both campaigns play on the popular sentiment that retirees have paid for their Medicare benefits – and that sentiment is incorrect, at least five times over in inflation-adjusted terms, or almost three times over if calculated with a reasonable rate of return.

Thanks to research from the Urban Institute, we know that almost all income and demographic groups experience high ratios of lifetime benefits to taxes paid in inflation-adjusted terms. These totals range from 225 percent for single men born in 1960 earning $110,100 annually, to over 2,500 percent for a married couple averaging $20,000 in annual income over 43 years (in 2012 dollars), and higher ratios for even lower earners.

The only ones for whom taxes exceed benefits are very high earners, because the HI tax is due on all ordinary income without an upper limit. For single men born in 1960, average annual income must top $248,000 before lifetime taxes exceed benefits, and for other demographic-income groups, the break-even income threshold is even higher. On average, these ratios hit their low points for those born in 1960 before rising again very slowly thereafter.

Source: Eugene Steuerle and Stephanie Rennane from the Urban Institute
Notes: Calculation for single males born in 1960. Inflation-adjusted in 2012 dollars. Assumes full scheduled benefits, regardless of trust fund depletion. Assumes work from age 22 through 64. Excludes both the costs covered by premiums and co-pays, as well as those offsetting cost-sharing revenues.

Many economists, however, prefer to calculate lifetime benefits-to-contributions ratios on the assumption that investment of annual earnings in something other than Medicare would have been earning a rate of return, most often in excess of inflation. For example, the 2011 Urban study referenced above assumed annual growth of inflation plus two percent, untaxed. Decades of compounded interest gains produce very different ratios, as shown in Table 2.

With a rate of return of inflation plus two percent each year, lifetime Medicare benefits often still exceed lifetime contributions, only at a lower ratio. Lifetime benefits-to-contributions for lower-income married individuals, single men, and single women range between 640 to 710 percent – still a large gain but below the 1000+ percent returns when only compared to inflation. Lifetime contributions begin to exceed benefits for single men earning a $143,000 average annual income.

Note: Calculation for single males born in 1960.

Under both scenarios, beneficiaries generally receive much more in Medicare benefits than they pay for. This largely stems from three factors.

First, Medicare Parts B and D generally charge premiums to cover only about 25 percent of the costs, leaving taxpayers on the hook for the remaining 75 percent. Beneficiaries have, however, paid the HI tax to fund Medicare Part A. Secondly, current workers, who are generally wealthier and pay higher payroll taxes than previous generations, fund the remaining gap for current retirees. (For example, in 1990, the HI tax was a 2.9% tax applied to the first $53,400 of income. In 2010, it was applied to all income. Starting next year, the rate above $250,000 will rise to 3.8%.) Lastly, all these ratios assume that scheduled benefits will be completely honored, even though Medicare's Part A trust fund is set to run out in 2024.

The bottom line is that retirees generally receive far more in Medicare benefits than they pay in. To remain sustainable, lawmakers will need to close that gap with targeted changes.

See below for a broader information set about Medicare benefits to taxes ratios.


The graphs above show benefits-to-taxes ratios for single males born in 1960. Below are tables showing these ratios for different demographics and different incomes. The first table shows inflation-adjusted totals (2012 dollars), while the second table shows totals adjusted for a two percent rate of return on contributions.

Ratio of Lifetime Medicare Benefits to Contributions, Inflation-Adjusted
Birth Year Demographic Average Annual Income* Benefits Taxes Ratio
1945 Married, Two Incomes $40,400 $446,000 $35,000 1,274%
$155,200 $446,000 $150,000 297%
Single Female $20,200 $237,000 $18,000 1,317%
$110,100 $237,000 $88,000 269%
Single Male $20,200 $209,000 $18,000 1,161%
$110,100 $209,000 $88,000 238%
1960 Married, Two Incomes $40,400 $611,000 $47,000 1,300%
$155,200 $611,000 $212,000 288%
Single Female $20,200 $323,000 $24,000 1,346%
$110,100 $323,000 $128,000 252%
Single Male $20,200 $288,000 $24,000 1,200%
$110,100 $288,000 $128,000 225%
Ratio of Lifetime Medicare Benefits to Contributions, Inflation-Adjusted, With Discount Rate
Birth Year Demographic Average Annual Income* Benefits Taxes Ratio
1945 Married, Two Incomes $40,400 $351,000 $52,000 675%
$155,200 $351,000 $217,000 162%
Single Female $20,200 $185,000 $26,000 712%
$110,100 $185,000 $126,000 147%
Single Male $20,200 $167,000 $26,000 642%
$110,100 $167,000 $126,000 133%

*Low income represents 45 percent of the average wage. High income is taxable maximum for Social Security payroll tax.