February 5, 1992
"U.S. Spending on the Elderly is 28% of Total"
San Jose Mercury News
By Timothy Taylor
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SOCIAL Security and Medicare have achieved a remarkable amount. In 1959, 35
percent of those over 65 fell below the poverty line. Even as recently as 1970,
25 percent of the elderly were poor. But today, the poverty rate among the elderly
has declined to 12 percent. Moreover, since the passage of Medicare in 1965, almost
all of the elderly have reasonable access to medical care.
But these astonishing gains haven't come cheaply. Federal spending on the average
elderly person rose an average of 4.4 percent faster than inflation every year
from 1965 to 1990. Federal spending on the elderly was $360 billion in 1990, 28
percent of total expenditures.
Sharp tax increases were needed to foot these rising bills. Social Security
and about three-fifths of Medicare spending are financed by a payroll tax collected
from both employees and employers. (The remainder of Medicare is three-quarters
financed by general tax revenues, and one-quarter financed by premiums charged
to the elderly.)
Back in 1950, the Social Security tax rate was 1.5 percent of the first $3,000
earned; thus, both employer and employee might end up paying a maximum of $45
in a year. The table below adjusts the "wage base" -- that is, the wages
on which the payroll tax is levied -- for inflation. Measured in inflated 1991
dollars, the wage base was $16,800 in 1950, and the total payment for an individual
(or employer) would have been $252.
By 1991, Social Security taxes were 6.2 percent of the first $53,400 earned,
so the maximum payment for employer and employee had risen to $3,310. As the table
shows, medicare payroll tax rates have also increased.
Contrary to popular belief, the federal government does not save up the money
any individual pays into Social Security and Medicare; instead, it is a system
where each generation has paid for its predecessors, and hopes in turn to be supported
by its descendants.
Because Social Security and Medicare taxes were relatively low through the
1950s, 1960s, and even the 1970s, today's retirees are getting a lot more back
from the system than they put in.
The Congressional Research Service calculated the total amount that an average
earning man retiring this year would have paid in payroll taxes, along with his
employer. If that amount had been saved up in a special account, accumulating
interest all the while, it would come to $84,000. However, if all the Social Security
and Medicare benefits to be received by this average earner were paid in one lump
sum, the value of the benefits would be $163,000.
In other words, average people are getting back about twice as much from Social
Security and Medicare as they contributed.
A lot of people don't want to talk about Social Security and Medicare as part
of the federal budget, especially when the talk is of how higher taxes or spending
cuts are needed to reduce the budget deficit. After all, they note, all of Social
Security and most of Medicare is financed by its very own tax, separate from the
rest of the budget.
Moreover, thanks to the rise in payroll taxes and the wage base since the early
1980s, the payroll taxes are now taking in about $75 billion per year more than
they spend. So they have nothing to do with the deficit, nor with the budget,
this argument goes, and should not even be discussed as candidates for the budgetary
I don't take this point very seriously. One can write down Social Security
and Medicare taxes and spending on an entirely different sheet of paper from the
rest of the budget, but surely, putting your money in two different pockets doesn't
change what you have available to spend.
When the Social Security and Medicare funds are building up surpluses, the
rest of the federal government borrows that money (and pays interest), which means
that the budget deficit can soak up less money from the rest of the economy. When
payroll taxes are rising sharply, that makes it harder to raise other taxes for
other purposes. Programs for the elderly are just too big to sweep under the rug,
with some weak pretense that they should (or can) be considered separately from
the rest of the budget.
Over the past 40 years, federal spending has risen from 19.8 percent of gross
national product to 24.8 percent of GNP, a rise of 5 percentage points. Over that
same time, spending on Social Security and Medicare, has risen from 0.6 percent
of GNP to 6.7 percent, a rise of 6.1 percentage points.
In other words, all of the increase in how much of the economy is absorbed
by federal spending during the last 40 years, and a bit more, can be accounted
for by higher spending on Social Security and Medicare. The proportion of the
economy spent on everything else, including defense, civilian programs, and interest,
has barely changed in 40 years.
Thursday: Personal Tax
|Social Security and Medicare are supported by a tax on payrolls,
paid by both the employer and the employee. Both taxes are levied against income
only up to a certain level, called the wage base on the table. Both the wage base
and the tax rate have risen over the years.
(x) Wage base converted to 1991 dollars by author, using consumer price index.
(xx) In 1991, the Medicare wage base was raised to $125,400, diverging from the
Social Security wage base for the first time.
Source: Social Security Bulletin, 1990 Annual Statistical Supplement, Table
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