Social Security and Medicare – Similar, but very different

It’s not uncommon for Social Security and Medicare to be lumped together when the topic of entitlements, or programs at risk for sustainability, or things that are exploding our national debt are mentioned. It’s not surprising in that they are both programs designed to provide support and care for our elderly population.

I’ll start with the similarities:

  • They are both entitlement programs. If you meet the eligibility criteria, you get it. In this case it’s an age criteria. For Medicare, it’s age 65. For Social Security, beneficiaries can start receiving financial support beginning at age 62, or they can defer until they are older, like 65, or 67, or 70. Beginning benefits at a later age means receiving a larger monthly amount. The amounts don’t increase after age 70.
  • They are both funded through payroll taxes. If you are employed, your employer pays half and you pay the other half. The total tax rate is 15.3% for wages up to $113,000. 12.4% is Social Security (6.2% per half) and 2.9% for Medicare (1.45% per half) The Social Security tax drops off entirely for wages beyond that. The Medicare tax does not have an income cap, and in fact, the rate increases by .9% for high wage earners (above $200,000 for individuals and $250,000 for couples filing jointly). This tax increase began on January 1, 2013. We’re starting to see the differences now.

The Differences:

  • Let’s stick with the way they are taxed. Social Security is taxed at a higher rate, but only up to a certain point of income. The Social Security tax is “felt” by more people as a significant tax. For high earners, it is only “felt” for the first $113,000. One result from this is that the distribution of the benefits is more equitable. If you recall from my previous post, the average wage earner retiring today paid in about what they get out of Social Security. The lower wage earner gets somewhat more out than they put in and the opposite for the high wage earner. The problems with Social Security are more due to demographics (fewer workers supporting more retirees).
  • Medicare is taxes at a lower rate than Social Security, but without the income cap. The rate difference doesn’t come close to reflecting the differences in benefits received. Social Security is taxed at just over 4 times the rate that Medicare is taxes. However, if we go back to our two income, average wage earning couple, instead of receiving 4 times the Social Security benefits, as compared to Medicare, they will receive about 1.6 times more Social Security than Medicare benefits. Because Medicare does not have an income cap, some of the “slack” is picked up by high wage earners who pay more in than they get out, but the program remains essentially highly under funded and unsustainable.
  • The biggest difference between Social Security and Medicare is how to fix them. Fixing the funding/benefit mechanism for Social Security shouldn’t (I know we’re talking Washington) be that difficult. Fixing Medicare – well, that’s why I started this in the first place.

In my next blog, I’ll share some proposed fixes to Social Security.

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About dmayeranderson

Husband, father, citizen, homeowner, Realtor and real estate investor.
This entry was posted in entitlements, medicare, health care. Bookmark the permalink.

3 Responses to Social Security and Medicare – Similar, but very different

  1. Russ says:

    Just entertaining the notion of needing to fix SS makes me nervous already. First, because nothing can be conceded to those you are convinced are not negotiating in good faith. Second, because SS will remain solvent for another two decades without changes, and any anticipatory fix that can accurately model the situation more than five years out has absolutely no historical precedent. Third, because saying SS and Medicare represent a risk to the economy is like saying that Warren Buffet and the the pizza delivery guy at the door average 20 billion in personal assets.

  2. Rob Hamer says:

    Without a doubt, Medicare is the 900 lb. gorilla. However, the discussion around Social Security does raise two valuable discussion points (albeit from a conservative viewpoint): 1) The fact that Social Security pays out about what is paid in over a lifetime of work should be a crime…any private investment manager would be fired for providing an annuity with a negative real dollar return and; 2) While there are theoretically no guarantees of anything in life, present-day legislatures are legally forbidden to bind future conferences. Said another way, government is legally unable to promise future generations anything. Social Security payments to retirees, since there is no lock-box or trust fund, are no more than a promise from current-day workers (tax payers) to retired workers to fund their retirement. At whatever point the taxes required of current day workers become politically untenable, due to the changing demographics of fewer workers per retiree, then contemporary politicians will change the promises made by earlier generations of politicians (or their replacements will). There is no security in Social Security.

    • Rob,
      I mentioned in my previous post, but should have stated again, that in the Urban Institute study, contributions to Social Security were presumed to have grown at a rate of inflation plus 2%. I honestly don’t know how close to reality that is. As for you other point, that would be concerning if the political winds shifted like that. All the more reason to fix the deficit problem now.

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