Answering reader questions about Medicare

Federal entitlement programs like Medicare have come under increased scrutiny as the federal government grapples with a growing federal deficit.

President Obama has called Medicare and Medicaid "the single biggest drivers of the federal deficit and the federal debt."

Sen. Rob Portman described Medicare now as an unsustainable program.

"A couple retiring today will pay about $119,000 in lifetime Medicare taxes and receive about $357,000 in lifetime Medicare benefits," the Ohio Republican explained. "So that's about 3 bucks in benefits for every dollar in taxes."

PolitiFact Ohio checked that statement and rated it as True.

But we subsequently heard from a number of readers who had questions or comments about factors that they thought would improve or change the the 3-to-1 ratio of benefits to taxes.

The response showed us that the topic is a major concern for readers, and that the Medicare system is often misunderstood.

We gathered the most frequently asked questions and went for answers to Medicare experts at the Kaiser Family Foundation, and to the Centers for Medicare & Medicaid Services of the U.S.  Department of Health and Human Services

Q: Aren’t my contributions to Medicare saved for my use later?

A: No. Taxes and premiums are not held in an account for those who pay them. Part A of Medicare is a pay-as-you-go system. Current contributions by those who are working are used to pay for the benefits for those currently retired or disabled.

The trust funds do earn interest which is used to pay for benefits, but not necessarily the benefits of those currently making contributions to the trust funds. The trust fund has accumulated money, but the accumulation of assets is projected by the Medicare trustees to be spent down over the next 10 to 15 years.

Q: Doesn’t compound interest increase my contribution over time?

A: In theory yes, and definitely the assets in the trust fund have earned interest over time, but if and when the assets are spent down fully, then there is no longer an opportunity for earning interest.

Q: Isn’t inflation taken into account? Doesn’t it increase the value of my contribution?

A: If anything, Kaiser said, it would work the opposite way.  That is, if you put in $1 today, it's going to buy less than $1 in 20 years (or some other future date).

Eugene Steuerle -- the former Treasury Department official who conducted the Urban Institute’s taxes-vs.-benefits analysis that Portman cited -- noted that a few people commented that the money they paid in taxes would be worth a lot more if they been able to stash it in a savings account.

"That’s why we adjusted for inflation plus 2 percent—about what a person could have realized in savings," he said.

Q: What about the employer contribution?Shouldn’t that be included in the amount that a couple pays in?

A: According to Steuerle, the tax calculations assume that the individual pays both the employee and employer portion of the tax -- so the employer contribution is included in that sense.  (Most economists believe that workers essentially bear the burden of this tax, because they believe that whatever amount employers pay in taxes or other non-cash benefits substitutes for cash wages the employer would otherwise receive.)

Q: What about the contributions of people who die before collecting any benefits?

A: When someone dies before collecting any benefits it does leave more money in the trust fund to pay for those who survive -- but it is does not amount to enough to have any impact on the ratio of contributions to benefits, according to the Centers for Medicare & Medicaid Services.

As we noted previously, Steuerle’s analysis for the Urban Institute is available online.
Steuerle also discusses methodology and conclusions in a Q and A.

"Medicare is facing a serious financing problem," he says. "You can perform these estimates a lot of different ways and still come to the same basic conclusion: Medicare taxes are far from enough to cover Medicare benefits."