Is Medicare also a Ponzi Scheme?

The American ^ | 10/24/2011 | Christopher J. Conover

[SeekAndFind]

Many retirees feel they have ‘paid’ for benefits through their payroll taxes. This is much closer to being true for Social Security than it is for Medicare.

Most Medicare recipients receive far more in benefits than they “pre-pay” through payroll taxes. Far too few Americans understand this simple truth, with the result that too many Americans think politicians have no business cutting “my Medicare.” Even though much vitriol of late has been directed at Social Security, Medicare is arguably far more of a Ponzi scheme than Social Security ever was.

The payroll taxes used to finance Part A Medicare benefits (hospital, nursing home, home health, and hospice care) don’t finance the rest of Medicare (physician and other outpatient services, pharmaceuticals, durable medical equipment, and preventive services). So over a lifetime, Medicare beneficiaries typically receive two to six dollars in benefits for every dollar they paid in Medicare payroll taxes (figure 5.6a).

In contrast, the various types of beneficiaries depicted in the above chart who turned 65 in 2010 had paid between 89 cents and $1.51 in Social Security payroll taxes during their working years for every dollar received in Social Security benefits. In that regard, Social Security is much more of an “earned” (meaning pre-paid) entitlement than is Medicare.

Leaving aside the intergenerational promise implicit in either entitlement, reducing future Social Security benefits is more akin to taking someone’s accumulated retirement savings than is an equivalent dollar reduction in expected Medicare benefits. This is not to argue that trimming future Social Security benefits—e.g., by adjusting the wage index used to determine downstream benefits—is illegitimate. It is simply to acknowledge that the visceral feeling many retirees or near-retirees have about Social Security—that they have “paid” for those benefits through their lifetime payroll tax contributions—is much closer to being true for Social Security than it is for Medicare.

Note that for those who started receiving Medicare in 1980, the situation was much worse. Because Medicare did not begin until 1966, beneficiaries had only made Medicare payroll tax contributions for at most 14 years rather than for a full working career (in contrast, the numbers for 2010 assume that beneficiaries contributed for 42 working years: from age 22 through 64).

Over a lifetime, Medicare beneficiaries typically receive two to six dollars in benefits for every dollar they paid in Medicare payroll taxes.

Readers may also be aware that until 1994, the 2.9 percent payroll tax levied for Part A was only applied to wage and salary income below a certain capped amount (the same maximum taxable earnings amount to which Social Security payroll taxes apply today: $106,800 in 2011). Today, there is no upper limit on the amount of earnings to which the Medicare payroll tax applies.

Moreover, under the Patient Protection and Affordable Care Act (PPACA), beginning in 2013, the 2.9 percent hospital insurance tax will continue to apply to the first $200,000 of income for individuals or $250,000 for couples filing jointly, but will rise to 3.8 percent on income in excess of these amounts.

However, none of these changes to “very high income” workers affects the figures on the chart. Why? For the purposes of the chart, “high wage” is defined as 160 percent of the average wage—$69,600 in 2011. That is well below the Social Security maximum earnings cap in 2011. Since even couples that include such high income workers are drawing twice as much in Medicare benefits as they are paying into the system (see bar farthest to the right), it’s clear that only very high income workers are actually able to self-finance their benefits through their payroll tax contributions.

Of greater concern, even accounting for the reductions in Medicare spending programmed into the PPACA, is that the ratio of lifetime benefits to lifetime payroll taxes will be nearly identical for 65-year-olds qualifying in 2030 as for those who began getting Medicare benefits in 2010. Thus, for most beneficiaries, the PPACA will help the country tread water, but has not significantly shrunk the fiscal imbalance.

So today and for the foreseeable future, the only group that self-finances their Medicare benefits are those who earned roughly three times the average wage—about $130,000 a year in 2011—throughout their working careers. This implies lifetime earnings over a 42-year career in excess of $5 million—a figure applicable only to a tiny fraction of the U.S. workforce.

Today and for the foreseeable future, the only group that self-finances their Medicare benefits are those who earned roughly three times the average wage throughout their working careers.

Ironically, only those who were already paying their own way will see their payroll tax contributions increased by one third under the PPACA. Unless we address Medicare reform head-on, everyone else will continue to enjoy benefits that greatly exceed their payroll tax contributions.

People can reasonably disagree about whether this tiny group already pays its “fair share” of taxes. But from the standpoint of Medicare as “insurance,” the outsized contributions of these highest-income earners relative to their expected benefits make as much sense as charging Warren Buffett more for his auto insurance merely because he has a greater ability to pay.

Moreover, as I’ve argued earlier, given the 44 cent penalty each additional federal tax dollar imposes on the economy, it makes no particular sense to be using tax dollars to pay for Warren Buffett’s Medicare bills in the first place. By the time he dies, he and his now-deceased wife jointly will have had in excess of $350,000 in expected lifetime Medicare benefits bankrolled by taxpayers. Even though he assuredly will have self-financed every penny, the economy will have lost $150,000 in output by running those dollars through the U.S. Treasury instead of letting Mr. Buffett pay for his own retiree medical expenses. There may be some unhinged Occupy Wall Street protesters who think that’s a smart idea. I do not. Serious Medicare reform is going to require a radical rethinking of the role of government in financing retiree health expenses.

Christopher J. Conover is a research scholar at Duke University’s Center for Health Policy and Inequalities Research and an adjunct scholar at the American Enterprise Institute. The charts shown are from his new book American Health Economy Illustrated, to be released in January 2012 by AEI Press. See PowerPoint version of Figure 5.6a and Excel spreadsheet on lifetime benefits and taxes for Medicare and Social Security from 1980-2030 for data, sources, and methods.

FURTHER READING: Conover also writes “Entitled to Leisure?” “Feeling Poorer? Healthcare Bears Some Blame,” “Government Share of Healthcare Is Far Bigger Than Advertised,” and “Health Is the Health of the State.” He also contributes regularly to the Enterprise Blog.

[Sacajaweau]

I'm retired and still paying into this to the tune of $100 excl. drugs a month plus I have to have additional coverage. It's more than I pay for food.

When Medicare started, the premium was $3 a month....about 1 hours pay at that time. Know anyone who makes $100+ an hour.?

P.S. The $100 comes right out of my SS. Since all SS must now be electronic deposit, it means the government effectively controls that account.

Pssst...and when you die...they will be there to confiscate your last SS payment.

[sodpoodle]

IIRC Medicare is available to those under 65 after 2 years of total disability.

Many retirees over 65 are healthy and do not ‘abuse’ Medicare services.

Additionally, Medicare participants pay monthly ‘insurance premiums’ for Parts B & D. The premiums are not insubstantial - plus there are deductibles and coinsurance applied for Parts A, B and D.

https://questions.medicare.gov/app/answers/detail/a_id/2305/~/medicare-premiums-and-coinsurance-rates-for-2011

[sickoflibs]

RE :”Most Medicare recipients receive far more in benefits than they “pre-pay” through payroll taxes. Far too few Americans understand this simple truth, with the result that too many Americans think politicians have no business cutting “my Medicare.” Even though much vitriol of late has been directed at Social Security, Medicare is arguably far more of a Ponzi scheme than Social Security ever was.
The payroll taxes used to finance Part A Medicare benefits (hospital, nursing home, home health, and hospice care) don’t finance the rest of Medicare (physician and other outpatient services, pharmaceuticals, durable medical equipment, and preventive services). So over a lifetime, Medicare beneficiaries typically receive two to six dollars in benefits for every dollar they paid in Medicare payroll taxes (figure 5.6a).’

Train wreck ping!

Don't look to Republicans for help on this either. The Ryan medicare proposal/plan symbolic (non binding) vote was only staged to help them in primary challenges. It wont be talked about again except maybe by Democrats trying to cause trouble,

[sodpoodle]

Just more evidence of ‘pitting one group against another’. Elderly vs. young.

If Medicare had been designed as ‘true insurance’ i.e. actuarialy sound; the Ins. underwriters would have factored in ‘reserves’ and excluded stuff like viagra.

[misterwhite]

This is an incentive for seniors to keep working full time. I know many who say they're working "just for the medical benefits" of private health insurance.

If the federal government wants to spend money to "create jobs", a lot of job openings could be created by addressing this problem.

[silverleaf]

I don't want to hear “analysts” bitching” about the cost of MEDICARE when virtually every policy of our government has been to FORCE retirees into the system starting at age 65.

Social security is TIED to MEDICARE. Decouple them and people can opt out.

There is a penalty if you do not sign up for MEDICARE as soon as you turn 65. Let people make their own decisions. If we are healthy and working at age 65, let us use those MEDICARE premiums (and continued payroll taxes) we are now forced to pay, to pay for private health coverage instead.

Military retirees are forced into MEDICARE at age 65, with TRICARE only as backup. Is that an “unearned” benefit?

and STOP USING THE RICHEST MAN IN THE US as an argument for means testing!!!!! arrrrghhhh

[The_Freemason]

Is it a Ponzi scheme? Is the Pope Catholic??

[GlockThe Vote]

Of course its a ponzi scheme. The entire us govt is a ponzi scheme.

[silverleaf]

Anyone who does not sign up for MEDICARE as soon as they hit 65 is hit with a heavy penalty when and if they do sign up. So you get to sign up, pay Medicare premiums, pay Medicare payroll taxes, AND pay private employer health insurance for secondary coverage (the USG makes sure MEDICARE is first line coverage)

So now the obamites are whining about senior consumption of health care services? Like selfish old people go to doctors more because it is free and fun?

yeesh

I have yet to see arguments against MEDICAID and how making it “free” to a growing middle class group drives up usage and costs.

[mountainlion]

SS and Medicare are theft by deception. They are breach of contract. They are proof of lack of ethics of our elected officials. We have been betrayed by those that lied to us to get elected.

[misterwhite]

"Anyone who does not sign up for MEDICARE as soon as they hit 65 is hit with a heavy penalty when and if they do sign up"

Doesn't that penalty apply only to those who have no coverage at all? In other words, if I am 65 and covered by an employer's plan, I can choose not to sign up without penalty?

Which was my example of seniors continuing to work.

[silverleaf]

No, it is age dependent

Visit the MEDICARE site for details

Also check with your employer!
Many assume you will go into MEDICARE at age 65 and that your employer-paid health covergae will become a supplemental

[circumbendibus]

I called the SS Office and was told that I could sign up without penalty within a couple of months after my wife stops working and no longer covered by employer plan.

[algernonpj]

Re:Just more evidence of ‘pitting one group against another’. Elderly vs. young.

If Medicare had been designed as ‘true insurance’ i.e. actuarialy sound; the Ins. underwriters would have factored in ‘reserves’ and excluded stuff like viagra.

And RE:
SS and Medicare are theft by deception. They are breach of contract. They are proof of lack of ethics of our elected officials. We have been betrayed by those that lied to us to get elected.

Two great observations.

I have set up spread sheet to help someone with medicare decisions. I made the following observations:
1. The cost of MedB, MedD, Medigap and copays & deductibles is about the same as with private insurance.
2. The coverage is less than that with private insurance.
3. Much more money goes to pharma and much less to physicians.
4. Private insurance reimbursement to physicians looks to be pulled down close to medicare reimbursement rates.

[Atlas Sneezed]

The simple solution is to float the age of qualification annually to maintain break-even solvency. it would be more fair to younger earners to honestly calculate a qualification age that is sustainable over the generations, and implement it now, but that would generate reserves for the government to steal, and be less politically acceptable to the greedy geezer class.

[gopheraj]

Regarding confiscating the last SS payment, I am going to start lobbying congress to change that. My BIL died on 9/27 and that’s what they did or rather the BANK took it upon themselves to return it without any notice from SS. My sister had a letter from SS giving her three months to pay it back which is enough time to give her to apply for a waiver. The bank is not saying a dang word to her on her over $2000 in overdrafts. She paid he last bills and funeral expenses. It’s ridiculous that your last SS check is not yours. You’ve accumulated bills during that last month and they have to be paid. You’re not paid early. The check you get in for the previous month and it SHOULD be yours. You either get it or pay early. Dont’ know what dumb@ss politician figured that out but it’s not right.

[sodpoodle]

When first introduced and for decades; Private Health Insurance was carefully underwritten, soundly administered and beneficial to the general public and the medical profession.

Group health insurance became an attractive employment inducement with continued good underwriting and ethical claims payment. Young working adults were the lowest risk group - until maternity and psych were added.

Medicare was a political ploy to get the elderly vote; retirees whose conversion from group to individual was cost prohibitive and those whose employees did not offer continued coverage. Unions jumped on board - more dues money for the Union bosses.

Truly double dipping - because during working years - employees pay for both their current plans AND Medicare.

[mountainlion]

My observation is that many doctors do take medicare.

[algernonpj]

My observation is that many doctors do take medicare.

Here in NJ many will take medicare IF you are already a patient. However many physicians will not take on new patients who are on medicare.