Catching On to the Entitlement Disaster

The Associated Press catches up, belatedly, with some of the basic problems with our welfare state. Those now retiring will find that for them, Social Security was a terrible deal. Medicare, on the other hand, will continue to bleed our children dry:

You paid your Medicare taxes all those years and think you deserve your money’s worth: full benefits after you retire. Nearly three out of five people say in a recent Associated Press-GfK poll that they paid into the system so their benefits shouldn’t be cut.
But a newly updated financial analysis shows that what people paid into the system doesn’t come close to covering the full value of the medical care they can expect to receive as retirees. Consider an average-wage, two-earner couple together earning $89,000 a year. Upon retiring in 2011, they would have paid $114,000 in Medicare payroll taxes during their careers. But they can expect to receive medical services — from prescriptions to hospital care — worth $355,000, or about three times what they put in.

That estimate is undoubtedly low, since many treatments that Medicare will pay for over the next thirty years don’t even exist yet.

Many workers may believe their Medicare payroll taxes are going for their own insurance after they retiree, but the money is actually used to pay the bills of seniors currently on the program. That mistaken impression complicates the job for policymakers trying to build political support in coming months for dealing with deficits that could drag the economy back down.

Gosh! Where do you suppose that “mistaken impression” came from?
The picture with regard to Social Security is considerably bleaker, if you are a baby boomer:

The same hypothetical couple retiring in 2011 will have paid $614,000 in Social Security taxes, and can expect to collect $555,000 in benefits. They will have paid about 10 percent more into the system than they’re likely to get back.

That is the result of the Democrats having demagogued Social Security for decades, thus blocking any changes in a terrible program. A reader who is highly sophisticated in financial matters emails:

Oh…and by the way….why is it that the rubes would think they are “entitled” because they have “paid into” the “system” and therefore their benefits are “earned”? why is that?….could it be the 75 years of false official and informal propaganda and misdirection from the sponsors and supporters of the middle class entitlement state? The intentional creation of phony “accounts” to disguise the actual program mechanics? The deliberately misleading terms and euphemisms designed specifically to give the impression that the benefits are “owned”, “earned” and “guaranteed”? The disgraceful, shameful, unabashed, dishonest and unceasing political attacks from the Dems and the left — including from Obama — on any attempts to reform Social Security or Medicare by deliberately lying to or misleading the elderly with scare tactics?
And look at the Social Security numbers given in the example…’s actually even WORSE than described! They point out the mismatch in total taxes–er, excuse me, “contributions”–to the total benefits expected to be paid out and note that taxes exceed benefits.. Well, yes they do, on an undiscounted basis, i.e., interest and the time value of money. In other words, the theoretical working couple, in the upper middle of the income distribution, let it be noted, but hardly in any sense “rich”, having paid a nominal $614,000 in taxes can expect to receive a nominal benefit payout of $555,000. But if they had taken their taxes and done nothing more than put them in risk free government bonds with an assumed real rate of interest compounded at only 1%, they would have accrued over $750,000 in investment capital. This would buy an annuity, again assuming only a 1% continued return on assets, of about $30,000/year on generous actuarial assumptions. This compares to, on the article’s numbers, about $19,000/year under the existing benefit scheme. Another way of looking at it is that on the most conservative assumptions they are receiving no more than a NEGATIVE return of minus 1.9% on their “contributions”! LITERALLY….if they had buried the “contributions” in the backyard they would be better off!
Ironically, the [Associated Press] authors think this is a GOOD thing about Social Security, compared to Medicare! It’s a feature, not a bug! Indeed, the only way Social Security can operate is if the later cohorts of retirees — the first of the baby boomers starting now — get this kind of return pattern. The earlier cohorts had exactly the same pattern as Medicare now–very low taxes paid in and very high benefits paid out–with the later cohorts underwriting their extremely generous returns while getting much lower outputs themselves later on–which is the very definition of an unsustainable Ponzi scheme!
Medicare, of course, is much worse with an essentially unlimited claim on taxes to pay future uncontrollable benefits that are promised. And the “political problem” of expectations about being “entitled”?….making reform difficult?….let’s make sure we have a complete understanding of the history of these programs….and of who owns the mess and is responsible for the “political difficulty” of correcting it as the first order of business.

Everywhere we look, the entitlement state is collapsing. We can fervently hope that both Social Security–a terrible program at best, since people should save their own money for their retirement, not pay it to the government in hopes of getting it back later–and Medicare, which is not only an awful program but threatens to bankrupt our government, are radically reformed or, better yet, phased out.

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