That Which is Unsustainable Will Go Away: Medicare

by CHARLES HUGH SMITH May 23, 2012

Here are the sobering facts about the number of workers and those drawing Social Security, Medicare and Medicaid entitlements in the U.S. While the government claims to have a "trust fund" to pay for Social Security and Medicare, this is illusory propaganda. There are no funds set aside to pay these entitlements--they are "pay as you go" programs funded by current tax revenues. If the tax revenues don't cover the programs' expenses, the Treasury sells bonds, i.e. issues debt to pay the entitlements.

Social Security (SSA) has 61 million beneficiaries as of March 2012.

Medicare has 49 million beneficiaries as of November 2011.

Medicaid has over 50 million beneficiaries; another source puts the current number at 58 million.

Kaiser Family Foundation says roughly 7 million "dual-eligibles" who receive both Medicaid and Medicare, so let's use the data point of 50 million Medicaid-only recipients.

We can assume that most people drawing Medicare benefits also draw Social Security, while the 8+ million drawing disability from Social Security are also covered by Medicaid.

However you slice it, there are roughly 60 million people drawing Social Security and Medicare/Medicaid and another 50 million Medicaid recipients for a total of 110 million people drawing significant entitlements.

As I have noted here many times, there are only 115 million full-time jobs in the U.S.

chart_full_time employees 2012

That means the ratio of workers to recipients of significant "pay as you go" entitlements is roughly 1-to-1: 115 million full-time workers and 110 million people drawing Social Security and Medicare/Medicaid.

These programs consume the majority of the Federal budget. The Federal government spends around $3.7 trillion and collects around $2.6 trillion in taxes, so the basic deficit is $1.1 trillion. Off-balance sheet "supplemental appropriations" mean the real deficit is actually considerably higher.

Social Security costs $817 billion, Medicare and Medicaid costs total about $800 billion annually, and program outlays rise every year. The Pentagon/National Security budget is around $690 billion.

As I detailed in The Fraud at the Heart of Social Security (January 17, 2011), the program paid out $707 billion in 2010 and collected $631 billion in taxes, a $76 billion shortfall for 2010. The current program (2012) cost is $817 billion, a leap of $100 billion in a few short years as Baby Boomers flood into the program.

Of the roughly 150 million workers in the U.S., 38 million earn less than $10,000 per year, 50 million earn less that $15,000 a year and 61 million earn less than $20,000 annually. All these numbers are drawn directly from Social Security Administration payroll data.

100 million wage earners, or 2/3 the entire workforce, earn less than $40,000 per year.

Median pay in the U.S. is about $26,360 annually, while the average pay is about $40,000. Since the average American household takes in $63,091 per year, it seems the typical wage is roughly $30,000 a year.

The Medicare tax is 2.9% of wages, 1.45% each for employer and employee. If the typical worker makes $30,000 a year for 35 years, then lifetime earnings are about $1 million. If we take the $40,000/year average, then that rises to around $1.4 million in lifetime earnings. The 2.9% Medicare tax thus totals about $30,000 to $40,000 in lifetime contributions for the average worker.

The average benefits extracted from the system run from $393,000 to $525,000 (due to the benefits extended to non-working spouses, benefits for never-married people may be somewhat lower). Average annual costs per beneficiary run as high as $18,000, though expenses typically rise significantly in the last year of life.

As I have reported here earlier, a friend's father was in the hospital a few years ago for less than a week for "observation" and a non-invasive gall-stone procedure. Medicare was billed $120,000, or roughly the lifetime contributions of three workers for this modest procedure and a few days in a hospital. My Mom had an office procedure performed on one of her toes and Medicare was billed $12,000. An office procedure (not in surgery) that took a few minutes absorbed 1/3 of my entire lifetime contributions to Medicare.

What we have is a system where the full-time worker to beneficiary is already 1-to-1 and the system pays out 10 times more per person than it collects in taxes. The Medicare system would need about 10 workers for every beneficiary to be sustainable. Right now the ratio is just above 2-to-1. That simply is not sustainable.

Tweaking the payouts doesn't change the basic math: "pay as you go" entitlements are not sustainable when the number of recipients equals the number of full-time workers. Programs that pay out $400,000 per person (many of whom did not work a lifetime) and collect $40,000 per lifetime of full-time work are not sustainable.

Wishing the math were different does not make it different.

For more on this topic, please see:

America's Hidden 8% VAT: Sickcare (May 10, 2012)

How We Do Harm: A Doctor Breaks Ranks About Being Sick in America (print)     (Kindle)

Charles Hugh Smith is a novelist and economic commentator who writes for Business Insider and blogs at Of Two Minds.


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