By law, 75% of Medicare Parts B and D, come from the general fund. The premiums pay for just 25% of the costs. And 40% of all Medicare expenditures come from the General Fund. If Medicare is not reformed, it will eventually consume the entire federal budget. Medicare has been running in the red since 2008.
This graph shows that the average man and woman (average defined in the study as average income over their working lives and living to the average life expectancy) who start receiving benefits in 2010 get over 3 times more in benefits than they pay in to the system! Of importance, the study accounts for inflation by calculating all past taxes and future payments in 2010 dollars to provide an accurate comparison.
If the notion that Medicare recipients are simply "getting back what they paid in" is false then where is the money coming from? Simply, the excess received is being borrowed from younger generations and the cost is more than we can bear.
Of course they get more back. Because you are forgetting about the effect of compounding interest.
If those contributions had been earning even a measily 5% interest over a lifetime... the total amount contributed (including interest) would be far higher.
Here’s an example of how this works:
Lets see joe smo goes to work at 25 and works until 65 (40 years) and always earns the same amount, and always pays the same amount (to keep things simple)
If he pays $1,400 a year for 40 years = $56,000
BUT
If you factor in a 5% interest rate that he could have earned on that money (that the government is getting to keep for 40 years interest free)
Then he has paid total of $169,119
That makes me think a little about my disagreement with a certain radio economic advisor who thinks it is wrong to get all your parents’ assets safe before Medicare can take them away.
On the surface, that seems to undercut my general assent to the “getting back what they paid in” argument you raise.
But it is not getting what I paid in, it is getting a return on my investment.
But then I have to wonder, how much would these hypothetical recipients have if they had invested that 55k steadily over their working lives?
Now, my figuring may have some issues, which I would like to have pointed out to me by anyone who can think this through more knowledgeably, but here is what I am thinking:
This is 55,000 put in total over the person’s working life, adjusted for inflation, etc, in 2010 dollars (note no wage gap assumed for male versus female!:)?
If I divide that 55k by 30 years then I have put in an average of 1833 per year, or 152.78 per month.
Going to moneychimp’s compound annual growth rate calculator yields a CAGR of 7.69 for the S&P 500 for the years 1980-2010, and an “average” return of 9.16.
Dave Ramsey’s Investment Calculator says that 152 a month for 30 years at 7% would yield over 184,000 - at 9% it would be 271K.
Now, if the individual worked for 40 years before retiring in 2010, the CAGR and “average” returns are lower (5.39 and 7.03 respectively), but the additional ten years of investment yield over 173K for the low figure, and 292K for the higher “average.”
In any of these scenarios, the taxpayer would have come out about the same at worst, and way ahead at best, to have invested that 55K in the market, with a lot more choice for how his health care was run.
Of course, my understanding of the figures may be completely off base, but given that the projected expenditures for men and women over the course of their remaining (future) lives is based on completely unknowable factors, it is probably at least as meaningful of an interpretation of what’s going on.
I also admit that hindsight calculations are irrelevant to making a past decision (forced) to invest in a government backed and guaranteed (maybe) insurance plan. On a certain level, the guarantee would be worth the lost possible income (if it were run by competent people), as no one wants to have uncertainty about their healthcare in their latter years. But we still have that uncertainty with Medicare and the ACA.
Further, if it is viewed as insurance, not an investment, no one pays a monthly premium their insurance company hoping “they will get back what they paid in,” they pay it knowing (hoping) that they will get back *more* than they paid in if there is a catastrophic occurrence in their lives. Otherwise they would simply save the money themselves, or not bother.
It is up to the actuaries at the insurance companies to determine the risk and likelihood of their product being needed. If they fail to make accurate predictions, they go under or get bailed out. If they are government, they print more money, or change the rules, or steal from the public at large or doctors in specific.
But any thoughtful person should have realized from the inception that Medicare was neither an investment nor an insurance program, but a forced Ponzi scheme with kickbacks and votes on the line for the enforcers.
We need to find a way to scrap it while honoring previously made payments, not kick the can further down the road.