Does Paying Retirees A Million Dollars In Government Benefits Sound Sustainable To You?

by John Hawkins | May 12, 2011 7:14 am

Here’s the blunt truth that most politicians don’t have the guts to tell you: Medicare and Social Security cannot survive in their current form. Either we make some significant changes to how the programs are run or one day, taxes will rise to an almost unimaginable level that will completely destroy the economy or the country will go bankrupt.

There is no magical option that will allow us to continue the programs “as is” after we get a little extra revenue from the rich. We can debate what sort of course corrections we need to make, but what’s not honestly debatable is whether the programs are going to cause a catastrophe without serious changes.

Over at the Wall Street Journal, John Cogan[1] explains how out of touch with reality the payouts for our senior safety net have become.

Readers may recall the 1950s TV show, “The Millionaire,” which portrayed stories of individuals who were given a “no strings attached” gift of money by an anonymous benefactor. Each week in one of the show’s opening scenes, a man representing the wealthy benefactor, John Beresford Tipton Jr., knocked on an unsuspecting recipient’s door and announced: “My name is Michael Anthony and I have a cashier’s check for you for one million dollars.”

That TV program is scheduled to return next year as a reality show, and the new recipients will be the typical husband and wife who reach age 66 and qualify for Social Security. Starting next year, this typical couple, receiving the average benefit, will begin collecting a combination of cash and health-care entitlement benefits that will total $1 million over their remaining expected lifetime.

According to my calculations based on government data, such married couples will begin receiving monthly Social Security checks that will, on average, total about $550,000 after inflation. They will receive health-care services paid for by Medicare that, on average, will total another $450,000 after inflation. The benefactors will be a generation of younger workers who are trying to support themselves and their families while paying taxes to finance the rest of government spending.

…n 1978, Congress instituted automatic cost-of-living adjustments for Social Security. That’s reasonable. But Social Security’s method of automatically increasing benefits to successive cohorts of retirees by more than inflation makes less sense. It means that the average worker who retires this year receives a monthly benefit that is about 23% higher after adjusting for inflation than the monthly benefit received by the average worker who retired 20 years ago. The average worker who retires 10 years from now is, in turn, promised an initial benefit at retirement that is 14% higher after adjusting for inflation than the average worker who retires today.

Under the federal government’s fee-for-service Medicare program, every time a senior citizen meets with his physician or health-care provider for a check-up, lab tests or surgery, somebody other than the patient foots most of the bill. That such a program should produce runaway costs is hardly surprising. Over the years, the government has expanded the type of services covered, such as prescription drugs, and it has assumed a greater portion of the program’s finances. Medicare premiums paid by senior citizens once covered half of the cost of physician and related services. They now cover one-fourth. Copayments once covered nearly 40% of these services’ costs. They now cover only 20%.

…Many of the million-dollar couples believe they rightfully deserve the benefits they have been promised. They have, after all, spent all of their working years paying into Social Security and Medicare. And true enough, the typical 66-year old couple and their employers, on their behalf, have contributed nearly $500,000 in payroll taxes (in today’s dollars) toward these benefits during their working careers.

There are lots of people who try to scare people to death about what could happen if we change Social Security and Medicare. However, it isn’t a choice between changing the programs or doing nothing. It’s a choice between changing the programs, bankrupting the country (and it’s hard to pay out benefits when you have no money), or having an 80% increase in income tax rates[2]. If you don’t want to change, let people know whether you prefer bankruptcy or those kind of massive tax increases, not just on the rich, but on everyone.

Endnotes:
  1. John Cogan: http://online.wsj.com/article/SB10001424052748703864204576314802790577650.html?mod=WSJ_Opinion_LEADTop
  2. 80% increase in income tax rates: http://www.nationalreview.com/corner/265052/very-good-question-about-our-national-debt-jim-manzi

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