medicare

What are Entitlements?

Entitlement Spending, at $1.412 trillion in FY 2006, is over half of the U.S. Federal Budget. The largest entitlement spending programs are Social Security and Medicare, as follows:

Social Security – $544 billion
Medicare – $325 billion
Medicaid – $186 billion
All other mandatory programs – $357 billion. These programs include Food Stamps, Unemployment Compensation, Child Nutrition, Child Tax Credits, Supplemental Security for the blind and disabled, Student Loans, and Retirement / Disability programs for Civil Servants, the Coast Guard and the Military

How Is Social Security Funded?

Social Security is funded through payroll taxes. Through 2017, Social Security collects more in tax revenues than it pays out in benefits because there are 3.3 workers for every beneficiary. However, as Baby Boomers start to retire and draw down these benefits, there will be fewer workers to support them. By 2040, the revenues to pay for Social Security will be less than the expenditures.

How Is Medicare Funded?

Unlike Social Security, Medicare payroll taxes and premiums cover only 57% of current benefits. The remaining 43% is financed from general revenues (i.e. including any surplus remaining from Social Security). Because of rising health care costs, general revenues will have to pay for 62% of Medicare costs by 2030.

Medicare has two sections:

The Medicare Part A Hospital Insurance program, which collects enough payroll taxes to pay current benefits.
Medicare Part B, the Supplementary Medical Insurance program, and Part D, the new drug benefit, which is only covered by premium payments and general tax revenues.

How Will the FY 2008 Budget on Entitlement Spending Affect the U.S. Economy?

Through 2012, entitlement spending is budgeted at about 10.5% of GDP, with payroll tax revenue at about 6.5% of GDP, so that these unfunded obligations add to the general budget deficit. For example, in FY 2006 Social Security brought in $608 billion in “off-budget,” extra funds from payroll taxes. However, other entitlement programs had expenses that far outweighed this “extra” revenue, creating a mini-deficit of $574 billion within the entitlement spending budget alone. The amount increases to $784 billion by 2012.

Long-term Impacts

Long-term, however, the impact of doing nothing about these burgeoning unfunded mandates will be huge. The first Baby-Boomer turns 62 this year, and becomes eligible to retire on Social Security benefits. By 2025, those aged 65+ will comprise 20% of the population.

As Boomers leave the work-force and apply for benefits, three things happen:

The percentage of the labor under 55 stops growing, providing less payroll taxes to fund Social Security.
GDP growth declines to less than 2% due to fewer workers.
By 2040, Social Security alone brings in less than it spends.

Getting Honest

Obama has stated that any further debate on his health care reform proposals needs to be “honest debate”. He implies that critics have been dishonest, which means we’re just lying.

In looking at the facts above, one need only ask the following question:

Are the budgetary problems facing ‘government workers’ in Washington, DC caused by the private sector, or by the government?

Obama wants to overthrow the private health insurance industry and fold it into a government run entitlement. Yet, the federal government has proven itself incapable of managing its current programs. How is adding more of the burden to the government going to resolve the baby boomer issue?

With all due respect, as a wise man once stated, “government is not the solution to our problems, government is the problem.”

What we need to be discussing is a way to turn over the government’s primary entitlements: Social Security and Medicare to the private sector, not the other way around. If not, the next thing ‘government workers’ will be proposing is how they can fold State, and private pension money into the black hole of the Social Security Ponzi Fund.

Obama’s solution: Solve a problem by compounding it. “We have to spend more money to keep from going bankrupt.”

American’s are simply saying, “No”.

Reality

The maximum social security benefit for 2009 for a person retiring at full retirement age (66) is $2,323. This is based on earnings at the maximum taxable amount for every year after age 21.

Analysis based on maximum benefits:

The total paid into the system by, or on behalf of, the recipient by the age of 66 is $266,377 ($235,042 of this since 1980).

The total paid in by the age of 66 with 3% compound annual interest is $394,785.

By the age of 74, the recipient will receive a full return of the amount paid in on their behalf without interest.

By the age of 77, the recipient will receive a full return of the amount paid in on their behalf with interest compounded at 3% annually.

Assuming the funds continue to receive a return of 3% through the annuity phase, the funds would last up to the age of 80.

So by the age of 74 the total paid in by the recipient plus amounts matched by employers are exhausted. If the government were able to achieve a meager 3% rate of return, the total savings at the time of retirement would be exhausted by the age of 77. Assuming a 3% return on investment during the annuity phase, the funds should last through the age of 80.

However, in reality, the average monthly benefit for social security recipients is only $1,061 per month or $12,732 per year in 2009. There are currently some 51.8 million recipients receiving some $55.0 billion in benefits each month.

Dishonesty

The only problem and it is a major problem, in fact it is a problem many times worse than the alleged health care crisis, is the fact that the government has stolen the Social Security Trust Fund. There is no trust fund. There are ‘no’ dollars in savings for the government to invest and receive even a meager 3% return. Every dollar paid into the fund this month will be spent this month, and then some.

Worse than that, the Federal Government has run up a National Debt of $11 trillion, and intends to increase this debt by another $9 trillion over the next 10 years. With the peak of baby boomers hitting retirement age in 2019, a $20 trillion National Debt, longer life expectancy, and a smaller workforce, how are politicians going to be able to keep this “ponzi” scheme going?

Honesty

It is clear to me that Washington, DC cannot be trusted with taxpayer’s money. We need to get the Federal Government the heck out of the retirement business. And don’t even talk to me about letting the government take over health care. I’m not hearing it.

We need to work on solutions that will allow American citizens to save for their own retirement, and to be able to pay for their own health care. At the same time, we have to figure out how to untangle ourselves from this massive ponzi scheme which politicians have gotten us into.

As far as I’m concerned, any solution that involves spending another dollar of taxpayer’s money better include a detailed cost benefit analysis. Any solution to the problems of our time that doesn’t involve drastic cuts in spending by the federal government is not a solution.

To even begin an honest discussion on social security, Medicare, health care or any other political issue being discussed these days, ‘government workers’ had better get honest with the public, and their proposals had better include the following: