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Medicare: A dangerously good deal By Morgan Housel
It's one thing to talk about the immorality of kicking the can down the road to future generations, but it's another to actually stop kicking According to a 2010 poll by the Tax Policy Center, three-quarters of Americans think entitlements like Medicare will create major economic problems over the next 25 years. But two-thirds oppose reducing benefits, and more than half oppose raising taxes.
Here's why: Medicare isn't just a good deal for retirees. It's an outstanding deal.
According to the Urban Institute, a couple with average wages retiring at age 65 in 2010 would have paid $88,000 in dedicated Medicare taxes over the course of their lifetimes (including their employers' share) but can expect to receive $387,000 in Medicare benefits. A 65-year-old couple retiring in 2020 will have paid $111,000 in Medicare taxes and can expect to receive $427,000 in benefits. These figures are adjusted for inflation and discounted to present value using a 2 percent real rate of return. It's likely that the returns earned on Medicare taxes will exceed what an average investor earns in the stock market (at the expense of someone else, of course) over the course of his life.
Every weekday JewishWorldReview.com publishes what many in the media and Washington consider "must-reading". HUNDREDS of columnists and cartoonists regularly appear. Sign up for the daily update. It's free. Just click here. But remember the Tax Policy Center poll: Voters by and large refuse both options. This is why we have deficits. It's one thing to talk about the immorality of kicking the can down the road to future generations, but it's another to actually stop kicking. Cans feel really good to kick.
That sentiment will probably grow in the future. In 1970, 10 percent of the U.S. population was age 65 or older. Today that's 14 percent, and by 2030, nearly 20 percent of the population will be eligible for Medicare. How do you think these people are going to vote? Will they easily give up their investment-of-a-lifetime Medicare benefits? I doubt it.
There are a few likely ways this will end. Raising the age at which people become eligible for benefits is one of the more palatable options, but it doesn't do much to the deficit, as a disproportionate amount of health-care costs are incurred when people are in their 70s and 80s. Growth in health-care costs is coming in below what budget analysts expected. If that trend holds, most of the runaway-spending budget forecasts could be proved too pessimistic. More likely, Medicare growth will come at the expense of other government programs -- nondefense discretionary spending is already on track to hit a 50-year low as a share of gross domestic product.
But here's what we know: The budget isn't hard to fix because politicians are evil or because one political party "doesn't get it." It's hard because what drives long-term deficits are programs that offer voters deals they can't refuse. Just pay a little now, and we'll give you a lot tomorrow -- who can turn that down? It's a dangerously good deal.
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Morgan Housel, a columnist at The Motley Fool, is a two-time winner, Best in Business award, Society of American Business Editors and Writers and Best in Business 2012, Columbia Journalism Review. He doesn't own shares in any of the companies mentioned in this article.
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