Medicare’s Cruel Paradox: It Is A Costly Subsidy For Seniors, But They Can’t Live Without It

Which statement is true? 1) Medicare will impose huge burdens on future taxpayers by providing trillions of dollars in government-funded health care to older adults. 2) Many seniors face massive, unaffordable out-of-pocket health costs in old age, even with that government assistance.

The answer is: Both.  And that’s the challenge policymakers must confront as they debate what to do about the Medicare program as 77 million Boomers move inexorably into old age.

Lawmakers such as House Speaker Paul Ryan (R-WI) see Medicare through the first lens, which helps explain why they’d fundamentally restructure the program to reduce the government’s share of those costs—and boost the share paid by seniors.  Yet, most Democrats see Medicare through the second lens—as a generous but insufficient source of assistance for much needed health care in old age. And that explains while they’ll strongly resist any efforts to limit that support.

Looking At Medicare Through Two Lenses

Try to look at Medicare each way—as a costly government subsidy and as a necessary support system for older adults who cannot pay for costly medical and long-term care—expenses that inevitably will rise as they reach their 80s.

Let’s start with the subsidy story. In 2027, the federal government will spend more than $1.4 trillion on Medicare, twice what it spent last year, according to the Congressional Budget Office. On average, a couple who turned 65 last year will receive $622,000 in Medicare benefits over their remaining lives, according to research by my Urban Institute colleagues Gene Steuerle and Caleb Quackenbush.  They paid $140,000 in Medicare payroll taxes over their working lives, plus an additional sum in income taxes(which finance a big chunk of Medicare Parts B and D), but much less, on average, than they’ll receive in benefits.

That is a generous government subsidy. And in 2027, Medicare will be nearly as costly as Social Security, the most expensive government program.

Now look at it the other way: Even with that assistance, older adults still face enormous health-related bills.

What Health Care Costs Seniors

A typical woman who turned 65 in 2016 had to put aside $143,000 to have enough money to pay for her medical costs for the rest of her life, according to the most recent analysis by the Employee Benefit Research Institute. A high cost senior—say, someone who lives many years with multiple chronic diseases—might have to put aside up to $350,000 at age 65 to pay all her bills. And, of course, it is impossible for most of us to know at 65 whether we’ll face those very high expenses.

And it gets worse. The EBRI estimates exclude the costs of long-term supports and services and other forms of personal assistance. Medicare pays for little or none of these expenses. A typical senior will need to save another $40,000 by age 65 to finance her lifetime out-of-pocket long-term care costs (about $76,000 on average).  But half will need to put aside more than that and one of every ten will need to save more than $100,000.

Combine the average required savings at 65 for both medical and long-term care and it comes to an average of more than $180,000, which exceeds the average total assets (including financial assets and housing) of those aged 65-74.

Now, it is easy to say of the Boomers, “They blew it.” They didn’t save when they could—and should—have. And that view is not entirely wrong. But many got caught in the transition from defined benefit pensions to 401(k) defined contribution retirement plans. They paid a growing share of medical costs while they worked. Many paid for their own college education and that of their children. And they tried to do it all at a time when wages stagnated (in part because employers shifted an increasing share of compensation to, you guessed it, health care).

“Life And Death”

So we are left with this: Medicare is an enormous government expense and paying for it will be a burden on current and future taxpayers. But it is also literally a matter of life and death for many seniors, who could not afford medical care without it.

Are there solutions? Sure, but they all require tough choices. On the medical side, we have to slow the growth of health costs. Inevitably, it will mean using less of it. Just shifting costs from taxpayers to seniors and back again is not an answer. On the long-term care side, it will mean finding a rational and sustainable way to deliver and pay for supports and services. Neither problem will be solved by make it an either-or-choice between taxpayers and seniors.





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