Each year, researchers at the Urban Institute issue a report that quantifies how much Americans pay into Social Security and Medicare versus how much they can expect to receive back. Turns out the average wage earner with an average lifespan does pretty well—receiving benefits well in excess of what they pay into the system.
The Urban Institute report, “Social Security and Medicare Benefits and Taxes: 2023,” found that lifetime Social Security and Medicare taxes are scheduled to be significantly lower than lifetime Social Security and Medicare benefits for most workers in future decades, based on the latest data.
A single man who earned the average wage every year of his adult life before retiring in 2020 at age 65 would have paid about $466,000 into Social Security and Medicare and can expect to receive benefits equal to $640,000.
Urban Institute report
Specifically, the report found that a single man who earned the average wage ($66,100 in 2023 dollars) every year of his adult life before retiring in 2020 at age 65, would have paid about $466,000 in taxes into the Social Security and Medicare systems, but can expect to receive benefits equal to $640,000—or an additional $174,000—over the course of his retirement.
A single female with average earnings ($66,100 in 2023 dollars) retiring in 2020 at age 65 would pay $466,000 in taxes but is likely collect $722,000 in benefits.
Another example in the report details a couple with one average earner and one low earner ($95,800 in 2023 dollars). Their Social Security and Medicare taxes totaled $676,000 if they retired in 2020, but their benefits are expected to reach $1,239,000.
The report compares the benefits and taxes paid by beneficiaries at the age of 65 from 1960 to 2060 calculated in 2023 dollars. The numbers presented are averages for hypothetical workers with specific work and marriage histories and longevity characteristics, but most other marital and wage combinations show similar results to the ones mentioned above.
While Social Security annual benefits have grown over time as wages have risen, the report notes that lifetime Social Security and Medicare benefits reach this level largely because an average individual retiring in 2020 is projected to live close to two decades after reaching age 65 (more than four years longer than the average individual retiring in 1960). The longer-living spouse of a couple, both aged 65, will live close to three more decades.
Given the projected near-term depletion of the Social Security trust fund (expected in 2034) and Medicare hospital insurance trust fund (expected in 2028), the report said the data allow policymakers to visualize how much scheduled lifetime Social Security and health benefits increase on a lifetime and annual basis, vary among people with different earnings and marriage histories, and vary across several decades of cohorts.
They also make clear that reforms could scale back the rate of growth of benefit increases and still allow lifetime benefits to increase significantly for each cohort of future retirees.
Because existing revenue shortfalls in Social Security and Medicare must be covered somehow, tables in the report allow reformers to compare the extent to which benefit cuts and revenue increases within those programs might be allocated across generations and different income groups.
More from the report
Under current law, Millennials who retire around 2060 are scheduled to receive about twice the benefits of Baby Boomers who retired in 2020: $1.3 million for a single male earning an average income, $1.4 million for a single female earning an average income, and $2.5 million for a dual-earner couple with one spouse earning an average income and one earning a low income.
While fiscal imbalances in Social Security, Medicare, and the rest of the federal budget may make this schedule of benefits hard to maintain, the report states numbers reveal substantial room for reformers to provide higher real levels of benefits over time, even if they pare down the growth rate in benefits.
Politicians leave system on autopilot
Those potential reformers in Washington D.C. have shown limited appetite at best for taking action to address the looming crisis.
A recent opinion column in The Wall Street Journal by economics, public policy, immigration and politics columnist Catherine Rampell addressed the Urban Institute study, lamenting that politicians on Capitol Hill seem “perfectly happy to leave the entitlement system on autopilot, with programs for seniors gobbling up an ever-growing share of our future spending obligations.”
Calling it a “fundamental challenge that clouds our long-term fiscal outlook,” Rampell questioned why we’re borrowing to fund the elderly while neglecting everyone else.
While potential solutions to the fiscal problem include some combination of raising taxes, raising the retirement age, reducing benefits, and/or increasing the number of working-age people who pay into the system (i.e., immigration), the column notes that to date, politicians have effectively ruled out all these options.
Kicking the can down the road has become the norm for politicians seeking reelection and presidential candidates who are wary of alienating voters by advocating for raising taxes or cutting benefits to address insolvency concerns of Social Security and Medicare.
The fund that pays Social Security benefits is on track to become depleted in about a decade, according to the 2023 Social Security Trustees Report. That would mean only 77% of benefits would be payable by 2033.
A recent Committee for a Responsible Federal Budget report shows that absent action from lawmakers, a typical couple would face a $17,400 cut to their annual Social Security benefits in 2033 if that 23% benefit cut were to happen.
“Any 2024 presidential candidate who pledges not to touch Social Security is implicitly endorsing a 23% across-the-board benefit cut for the 70 million retirees when the Social Security retirement trust fund reaches insolvency in just a decade,” the CRFB report concluded.
SEE ALSO:
• Explaining the Misperception Behind Social Security Insolvency
• Social Security Trust Fund Projected to be Depleted in a Decade
• Opponents Slam Bipartisan Bill for ‘Fast-Tracking’ Social Security Cuts
• Social Security Backers Worry Cuts on House Speaker Johnson’s Agenda
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
That average worker’s employers also paid the same amount into the systems as did the worker. Not sure if that was included unt the ‘paid into’ part of the calculatio?
What about the consideration of how this money should have grown over the course of the employees working years? The value of the payments still does not exceed what the portfolio could have been worth had it been invested over time.
M y thought is the Urban expects us to be happy with a zero rate of return for letting the government use our money with no interest owed. . And looking at the math, the 174k gain is cumulative 38% return, but spread out over 35 years compared to a well managed portfolio of securities, is pretty yucky.
Just one more food for thought. Ever wonder why age 65 was chosen for full retirement benefits? Because the average life expectancy at the time was age 64 and very few lived much longer. It was never expected to be paying benefits for 20+ years like today. So until we find a way to reduce life expectancy, like inventing a virus that primarily affects the elderly or rationing heath care, there are 2 choices. One increase the age for full retirement benefits, or raise the contributions needed to make it solvent.
There is a 3rd option however it’s not likely. Tell the government to find another source of revenue and invest social security taxes withheld in Individual investment accounts of which could be government back securities but only with interest paid. JMO.
It’s amazing – or is it negligence – to publish a “study” that is silent with regard to the time value of an invested dollar. It must be counting on the lack of financial literacy to try to make a contrived policy point. Yes, the FRA needs to be gradually raised – perhaps one month for each year for those born after 1965 until age 70. And the 8% deferral for working beyond FRA should be reduced for those retiring after 2025 to 6% annually.