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What Medicare is Worth to You

Last update on: Feb 02 2017

Most people don’t know much about Medicare, even current beneficiaries. People planning for retirement don’t know much either, as surveys consistently show. As this article says, they’re clueless. A few points it makes are that we aren’t paying into a trust fund that funds our benefits during retirement. In fact, most of the benefits paid by Medicare come from current federal tax collections. Premiums pay about 12% of the costs each year. The small and shrinking trust fund covers about 39% of the costs.

The situation will become worse, because the working age population is shrinking while the number of beneficiaries is increasing. It’s an unsustainable program, but no one is willing to do anything about it. The Affordable Health Care Act of 2010 makes things worse by taking some money from Medicare and shifting it to other parts of the government health benefit structure. When the older part of the population is increasing and the younger part is decreasing, a program that transfers wealth from the younger to the older won’t last indefinitely.

The net present value of the transfer — the amount that would have to be set aside today to fund Medicare’s future intergenerational promises — has grown to at least $25 trillion, as calculated by the Government Accountability Office. This number is buried in footnotes of the annual Treasury-OMB report and is so large (almost twice the $14 trillion value of all public U.S. companies) that it defies comprehension. It’s not surprising that Americans can’t relate the alarming cost of this transfer to their own lives.

But recent work by the Urban Institute calculates the amount of the transfer to an average retiree. An American man retiring in 2011 could expect to receive Medicare benefits worth $170,000 (in 2011 dollars). If he had worked from age 22 at the average U.S. wage each year, he would have paid Medicare taxes (plus interest) worth $60,000 (also in 2011 dollars). So the average male worker retiring in 2011 will receive benefits worth almost three times what he paid in. And the transfer to that retiree will be $110,000 from younger Americans, perhaps including his grandchildren.

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