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Do You Come Out Ahead On Social Security, Medicare?

During the working years, you pay a lot of taxes for Social Security and Medicare, but you later receive a lot of benefits. Over a lifetime, do your benefits equal or exceed the taxes?

Your Social Security and Medicare taxes don’t go into separate accounts in your name the way 401(k) contributions are. That makes it harder to tell whether you receive more or less in benefits than you paid in taxes during a lifetime. Also, you can’t really know until after you pass away and the amount of benefits actually received is known.

Most people guess at the answer, but the Urban Institute periodically issues a report that crunches the numbers to try to answer the question. The report has to use estimates such as average life expectancy and median lifetime income to develop profiles and estimates of the net effects on composite individuals. Even so, it’s a useful guide to how the average person fares under the programs.

The report found that for a single male worker who earned average wages every year of his career and retired in 2020 at age 65, the lifetime Social Security and Medicare benefits would exceed the lifetime taxes by $550,000. The benefit is greater for a married couple that had one wage earner who earned below-average wages over his or her career. That couple’s lifetime benefits exceeded lifetime taxes by $1.1 million.

The benefits are less, but still a net positive, for higher income beneficiaries. The researchers estimate that millennials who retire around 2060 will receive about double the net benefit from the programs.

The report contains other profiles and comparisons. There’s no surprise that the median and lower-income individuals receive higher net benefits than the upper income individuals. Both programs are means-tested in different ways to ensure lower-income individuals receive more benefits per tax dollar than higher-income individuals.

Overall, the report finds that at all income levels the programs pay more in benefits than beneficiaries pay in taxes.

You can argue about the specific net benefits found in the report. The report counts only the designated Social Security and Medicare taxes. It doesn’t count any income taxes that go into the federal government’s general fund but are used to supplement Social Security or Medicare. It also doesn’t take into account any investment returns the taxpayer might have received by investing the money instead of paying it into the programs.

But things are changing and are likely to change more. For higher-income taxpayers, Social Security taxes are starting to exceed lifetime expected benefits. Given the fiscal state of both Social Security and Medicare, benefits and taxes are due for adjustments. Congress is likely to have to increase taxes or reduce benefits or a combination of both in the coming years.

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