Medicare Taxes: Getting Your Money’s Worth

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According to an Associated Press poll, 66% of Americans believe they will receive all of the Medicare taxes that they have paid when they retire. American’s believe that they have full rights to their benefits, without any reductions. New analysis has shown that the amount of money people contribute to the system does not cover the benefits they receive when they retire. Their actual benefits will be three times what they paid.

Analyses show that a person earning an average of $89,000 per year, and retiring in 2011, will have paid $114,000 in Medicare taxes over their working years. They will receive approximately $355,000 in Medicare benefits when they retire, which includes all health care.

These estimates were calculated by Stephanie Rennane and Eugene Steuerle at the Urban Institute. These figures show that there is a wide gap between what Americans expect and what Medicare actually pays. While they may be worried about Medicare’s future and funding, they don’t realize how big the gap is. Eugene Steuerle stated, “The fact you have put money in the system does not mean that it is there waiting for your to collect.”

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American workers believe that the money they contribute to Medicare will go towards their retirement benefits. The money is actually used to help seniors who are currently covered by Medicare. This disconnect makes it more difficult for policymakers to gain political support in dealing with Medicare deficits.

Social security taxes and future benefits are coming closer to balancing. A person who earns $89,000 will pay $614,000 in Social Security taxes when they retire in 2011. This person will receive benefits totaling $555,000. The difference between what was paid in, and what is paid out is 10%.

The Urban Institute’s main focus is on economic and budgeting issues. They update their financial estimates regularly and are accepted by Washington policymakers and other Washingtonians. These estimates are intended to show the average taxpayer complex financial information about Medicare and Social Security in a way that they can comprehend.

Medicare is stuck in the middle government’s budgeting problems. Budgeting is more difficult because of the unpredictable and high-priced nature of health care. Some proposals have been made to make major changes to the Medicare system. Some plans call for the replacement of Medicare with fixed pricing to allow people to purchase their own plans.

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There are many reasons why there is such a wide gap between what is paid in Medicare benefits and what is actually paid out. The first is the continuing rise in healthcare costs.

One person who retires in 1980 will get $74,800 in health benefits. A person who retires in 2010 will get $181,000 in medical benefits during retirement. These figures were adjusted to reflect the dramatic rise in healthcare costs.

Second, the Medicare payroll taxes amount does not fully cover the cost. This money is paid to a trust fund that pays inpatient care benefits. A mix of resources is used to pay for outpatient visits and prescription expenses. These visits can be covered by both premiums from beneficiaries or from a general government fund. Senior citizens pay only one-fourth of the cost for health care benefits through their premiums.

The retirement of baby boomers is the third reason. 2011 will be the first year that Medicare is available to the baby boomer generation. This could push Medicare to the top. Medicare currently covers 46 million seniors and disabled people. The remaining baby boomer generation will retire in 20 years and Medicare will cover over 80 million people.

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In the same period, the ratio workers who pay taxes to support Medicare will plummet. The ratio currently stands at 3.5 to 1, but it will drop to 2.3 to 1 in 20 years. Eugene Steuerle stated that it is impossible to continue “shoving all these costs to future generations…we are absolutely unsustainable.”