The End of Medicare as We Know It

We’ve already heard superheated rhetoric from political candidates who attempt to frighten certain sectors of the public by implying that the opposing party will “end Medicare as they know it.”

But the basic fact – that Medicare as we know it WILL end – is not the figment of some office-seeker’s overly active imagination.  Rather, it is cold, hard mathematical reality. 

According to a recent Economist, in 2011, the US government spent $549 billion paying Medicare benefits to 49 million beneficiaries.

Per capita annual outflow = $11,204 per beneficiary. 

Now, let’s examine what flows in during a worker’s lifetime. 

Here, we must make some assumptions.  In order to keep this simple, we’ll assume:

1) median household income (2010) of $49,445 (source:  US Census)

2) 40-year working life

3) 2.9% Medicare tax rate

This number will overstate what each beneficiary contributed over a working lifetime, since the income number is current household (rather than individual over time), most careers are less than 40 years, and the tax rate was lower than 2.9% for much of the working life of today’s beneficiaries.

Multiplying this out ($50K x 40 years x 2.9%) = $57,356, or rounded to $58,000.

The key point is that on a median basis, today’s beneficiaries contributed at most $58,000 into Medicare over their working lifetimes, which means that on the most optimistic basis, Medicare beneficiaries will run through what they have put into the system in slightly more than five years. 

$57,356/$11,204 = 5.1 years. 

The only way such a system is sustainable is for many more workers to contribute into the system than take from the system – into perpetuity.

Unless we can stomach the US having the population density of Bangladesh (where the equivalent of half the US is crammed into a space the size of Iowa), and still maintain a functioning economy, this simply won’t happen – regardless of who is President or how they claim the system will always deliver what it promised.

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