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.
- 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.