Uncle Sam’s promise to millennials: Pay $600K, get $2M in retirement


September 16, 2015

WASHIGTON, DC: There’s been lots of public hand-wringing about how the nation will pay for the Social Security and Medicare promises it has made to the Baby Boomers.

But new calculations from Urban Institute senior fellow C. Eugene Steuerle highlight an even bigger, if more distant problem: what the current law promises Millennials.

September 16, 2015

WASHIGTON, DC: There’s been lots of public hand-wringing about how the nation will pay for the Social Security and Medicare promises it has made to the Baby Boomers.

But new calculations from Urban Institute senior fellow C. Eugene Steuerle highlight an even bigger, if more distant problem: what the current law promises Millennials.

Steuerle and his research associate, Caleb Quakenbush, figure that under current law, an average income one earner married couple who turns 65 in 2060 is entitled to lifetime Social Security and Medicare benefits (net of Medicare premiums) worth $2,057,00 (in present dollars), while they’ll pay lifetime Social Security and Medicare taxes of just $594,000 (also in present dollars). In other words, they’re supposed to get back 3.5 times the value of what they pay in. By contrast, an average income one earner Baby Boomer couple turning 65 in 2020 will receive an average of $990,000 in benefits, after paying an average of $364,000 in Social Security and Medicare taxes, or 2.7 times as much as they put in.

The main reason Millennials have been promised even more than their parents is that Medicare costs are expected to continue to grow, while the years Millennials will be getting those benefits will be growing too. Despite increasing life expectancy, the age of eligibility for Medicare has remained at 65 since the program’s creation in 1965. Social Security is a much smaller part of the problem, but the trend is the same. The  last “fix”  to the program’s finances, back in 1983,  raised the  “full” or “normal” retirement age for those born from 1943 through 1954 from 65 to 66, and then boosted it by another two months per year, so that it reaches 67 for those born in 1960 or later. But no further increases are currently part of the law.

Of course there are huge differences in the benefits payback depending on income, sex and marital status. Low and average earners and one income couples get a proportionately bigger subsidy than do highly paid folks and two income couples. (At the extreme, a single male who earns the maximum amount subject to Social Security taxes–$119,100 in 2015—will, on average, pay in more in Social Security and Medicare taxes than he gets back, if he was born in 1950 or later, Steurele’s calculations show.

But the trend of ever more unaffordable retirement promises is unmistakable and the main point that Steuerle hopes to drive home with his stunning new calculations. In an interview yesterday, and in a recent book, Dead Men Ruling, How To Restore Fiscal Freedom And Rescue Our Future, the veteran budget and tax expert argued that old age entitlements, passed and then fattened by Congresses in decades past, combined with tax cuts and an unwillingness to control medical spending, are increasingly crowding out spending on other needs, including investments in infrastructure and education.

“I’m trying to get people to face the facts,’’ Steuerle said.  He noted that the individual payback numbers actually understate the problem, which is compounded by  demographic changes. Despite the existence of a dwindling Social Security “trust fund,” both Social Security and Medicare are run mostly on a pay-as-you-go basis—there isn’t an account for each recipient that has to balance out.  And the shrinking pool of workers, relative to the number of retirees, exacerbates the funding burden. Back in 2000, before the Baby Boomers started to retire, there were 3.4 workers for every retired Social Security recipient. Last year, with the oldest baby boomers already retired, there were 2.8.  The Social Security Actuary predicts that the ratio will continue to fall, to just 2.1 by 2035, when the youngest boomers will be 71 and all receiving Social Security.

As Steuerle puts it in a column he is publishing today:

“In fact, a very high proportion of all growth in federal government spending over the next several decades is currently scheduled for Social Security and Medicare. Almost all other spending, whether for children or defense, infrastructure, or the basic functions of government, already is held constant or in decline in absolute terms, and sometimes in a tailspin relative to the size of the economy and the federal government. Only other forms of health care and retirement support, interest costs, and tax subsidies are on the rise.

Such developments are hardly sustainable. Simple math tells us that they will continue to impose costs that the Millennials and younger generations are already experiencing: cuts in other benefits for them and their children, higher taxes, and reduced government services when they are in school, working, or middle-aged.

Next time you read a headline on growth in student debt, the falling real value of the child credit, declines in federal spending on education and infrastructure support, or fewer soldiers and sailors, keep in mind that these stories all follow as a consequence of where past Congresses have directed almost all government growth.”

While Steurele is making a compelling  policy point, his new calculations also drive home how dangerous it is for individual Millennials to count on receiving all the benefits now promised them .  In a recent AARP survey, 75% of those ages 18 to 29 said they expected to rely on Social Security “substantially,” or “somewhat” for their own retirements, up from 62% in 2010.  It’s important to note, however, that 55% of the same young folks said they agreed completely or somewhat with the statement “Social Security won’t be there when I’m ready to retire.” Still, they’re not ready to abandon the program; 81% of young adults said they’d be willing to pay more to make sure it is there for them.

The political reality is that Millennials will be paying for the promises made to the Baby Boomers—almost no proposals that the politicians are brave enough to put forth would affect benefits for those already retired, or even, in most cases, over 55.  (Around the margins, the pols have been willing to raise Medicare premiums—that is reduce subsidies—for better off retirees. And as part of any grand compromise, they might also limit some inflation adjustments for retirees. But beyond that, cuts for the Boomers seems unlikely.)

So while they’re forking out for their parents’ benefits, younger voters will have to decide how much they want in guaranteed benefits for their own retirements, and how much they’ll willing to pay for it. No problem, right? They can add that to a to-do list that already includes paying off student debt and feeding their 401(k)s.  And, oh yeah, maybe buying homes and starting families. (A separate May report from the Urban Institute found that so far, the Millennials are having kids at the lowest rate of any generation in U.S. history, although with even the oldest Millennials still of child bearing age, a baby boomlet is still possible.)

Courtesy: Forbes