Too Generous Yet Not

Richard Quinn

I JUST REVIEWED MY Social Security earnings record. It brings back memories. For instance, it shows I earned $105 in 1959 when I was age 16 and working after school in the city library for 75 cents an hour. I’ve paid Social Security taxes every year since, though in 2020 they were based on earnings of just $2,333 and I was counted as self-employed. That darn blogging money.

Here’s something to put matters in perspective: Over 64 years, my employers and I have contributed $265,871 in payroll taxes. That’s a lot of money. But consider that, since I began collecting Social Security in 2008, it took just 9.4 years to get back that amount in benefits. If you consider my wife’s spousal benefit based on my earnings record, all the payroll tax payments were recouped in only 6.2 years.

At age 65, life expectancy is 17.9 years for men and 20.5 years for women. That suggests that Social Security is a pretty good deal for other retirees as well. But it also highlights why the system’s finances are so precarious. To make matters worse, there are currently 2.8 workers for each Social Security beneficiary, down from 5.1 in 1960. By 2035, there will be just 2.3 workers for each beneficiary. That means less people forking over payroll taxes to cover the cost of Social Security for me and other retirees.

Since my wife and I began receiving Social Security in 2008, our benefits have increased almost every year due to cost-of-living adjustments (COLAs). Medicare premium hikes have offset those increases somewhat and, indeed, my net annual benefit decreased during a couple of years.

In 2021, there have been calls for higher annual COLAs and even a guaranteed 3% annual increase, regardless of inflation. No doubt many retirees could use the extra cash. But will that matter if Congress continues to ignore the underfunding of Social Security and benefits are cut by 23% or so in a few years, when the Social Security trust fund is finally depleted and the system is financed almost solely with payroll taxes?

No, that 23% cut won’t actually happen. But it’ll be interesting to see how close to the brink politicians will go, as they struggle to avoid telling citizens that higher taxes are needed to keep the promises made decades ago. Maybe it’s no surprise that 23% of Gen Z and 26% of millennials believe theres little chance Social Security will be part of their retirement.

When I discuss the value of Social Security relative to taxes paid, invariably some folks comment that—if they were given the taxes to invest—they could do much better and end up with a sizable pool of cash in lieu of a monthly Social Security check. For a savvy investor and a totally disciplined person who over 40 years encounters no adverse life events, like disability, divorce and job loss, I bet that’s possible. But for the other 99.99% of Americans, not so much.

Following Medicare’s enactment in 1965, I and other workers began paying Medicare payroll taxes the following year. Since then, my employer and I paid $195,797 in Medicare taxes. Again, it sounds like a lot of money—until you consider the health benefits paid on behalf of my wife and me in just the last two years. The confrontation in May 2019 between my wife’s eye and a baseball resulted in medical bills of well over $100,000 and still counting. Pre-2019 claims more than offset the other $95,000.

Despite the taxes paid by me and everyone else, the Medicare hospital trust fund is in poor shape. According to the trustees, the assets in the hospital trust fund are, by 2026, projected to be insufficient to cover the shortfall between spending and revenues. By contrast, the Medicare Part B trust fund is funded, in part, by the federal government’s general revenue and hence can’t go bust.

Despite the program’s huge spending, Medicare arguably offers woefully inadequate coverage. There’s no out-of-pocket spending limit, and potentially high deductibles and copayments. As a result, most beneficiaries purchase supplemental Medigap insurance. Indeed, for the average retiree, premiums for Medicare Part B, Part D and Medigap run around $400 a month. That’s quite a chunk out of the average Social Security check.

The bottom line: I understand why folks complain that Social Security benefits are too low and Medicare coverage is inadequate. Yet it also strikes me that Social Security and Medicare have delivered a good return on my payroll tax “investment”—perhaps too good, as evidenced by the shaky finances of both systems. Do we want benefits to continue as is and perhaps even get better? I’d like that. But I’d also like to know who’s going to foot the bill.

Richard Quinn blogs at Before retiring in 2010, Dick was a compensation and benefits executive. Follow him on Twitter @QuinnsComments and check out his earlier articles.

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