The Sunday edition of the New York Times ran a long piece on social safety net programs. There are a lot of gems in it, and I would recommend reading the whole thing. With that said, I was troubled by one aspect of the article. In parts of the piece, the author talks about financing old-age entitlement programs, but does so in a way that perpetuates the confusion about how these programs work.
From the article:
Medicare’s financial problems are much worse than Social Security’s. A worker earning average wages still pays enough in Social Security taxes to cover the benefits the worker is likely to receive in retirement, according to an analysis by the Urban Institute. Social Security is still running out of money because the program must also support spouses who do not work and workers who earn lower wages. But Medicare’s situation is even more dire because a worker earning average wages still contributes only $1 in Medicare taxes for every $3 in benefits likely to be received in retirement.
[…]
Medicare is often described as an insurance program, but its premiums are not nearly high enough. In simple terms, Americans are getting more than they pay for.
The problem with the way this analysis proceeds is that it assumes that Social Security and Medicare are savings programs. But they are not savings programs and they never have been. Social Security and Medicare are redistribution programs, clear and simple. In both cases, income is transferred from those currently working to those currently retired. In Medicare, the income is transferred via medical benefits. In Social Security, the income is transferred via checks sent out to seniors. Perhaps because Americans have been made to feel uncomfortable about redistribution, old-age entitlement programs are universally described as savings programs: you pay into it and you get that back.
The reality is that when you pay into these programs, your money goes to those who are retired at the time (and any surplus into a trust fund account). When you retire, your money comes from those who are working at the time. The takeaway from this is that it does not matter at all what you paid into it; it only matters what those currently working are paying into it. The amount of money available to pay out in benefits is almost solely dependent on the incomes of those currently working. If their incomes are much higher than the income you made when “paying into it,” then you can easily and non-problematically receive more money in benefits than the taxes you “paid in.”
So when we are trying to determine the future solvency of old-age entitlement programs, the difference between the taxes a person pays in their lifetime and the amount of benefits they take out in retirement is totally and completely irrelevant. It would not matter that someone receives $3 in Medicare benefits for every $1 in taxes they pay into it if, when they retire, the economy has grown so much that the current workers are paying enough to fund those $3. It turns out that given the projected growth of Medicare and the projected growth of the economy, there will be an unsustainable deficit soon. But that deficit has nothing to do with the gap between the amount of money individuals pay in over their lifetime and how much they take out.
By shifting the focus to what actually defines our funding limits, we start to see that we can take out significantly more money than we pay in so long as the economy grows, which it generally does. Wrongfully describing old-age entitlement programs as savings programs creates widespread confusion and hysteria that more accurate descriptions would not. This wrongful description tends to make the programs seem far less viable than they actually are, which fuels the right-wing’s long-standing agenda to dismantle them altogether.