The Growing Social Security and Medicare Problem

Young adults will be left holding the bill for unsustainable Medicare, Social Security.

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It’s the beginning of a New Year, meaning crowded gyms, commercial breaks filled with weight-loss ads, and a glass-half-full attitude about the upcoming year. That glass half full should be just enough to dissolve my Alka Seltzer, because all this positivity is enough to give me heartburn.

You’ll have to pardon my less than cheery spirits. I am, after all, in the minority amongst my generation, who happen to be the most optimistic age group when it comes to our financial circumstances. There are no doubt reasons to be hopeful about the new year. A new Duke University study finds that chief financial officers rate their optimism at a 49, up 10 points from last quarter. Whether this leads them to loosen the reins on their cash reserves and start hiring is still to be seen.

But my down-in-the-dumps attitude has nothing to do with today’s economy and everything to do with tomorrow’s entitlement problem. Simply put, it stinks being a young adult. That is because today’s entitlements, especially Medicare and Social Security, are unsustainable in the long term. [Read more about the economy and unemployment.]

To show you just how unsustainable, consider recent research by economists Eugene Steurle and Stephanie Rennane of the Urban Institute. They estimate that for a two-earner couple making an average wage of $43,100 per year, each spouse will receive $530,000 in Medicare benefits over their lifetime while paying only $167,000 in Medicare payroll taxes. In other words, the government, through its Medicare system, is losing $363,000 over the lifetime of an average person.

That doesn’t strike me as sustainable.

Social Security benefits are also growing at an untenable rate. In a separate report, the same researchers found that a combination of past legislation guaranteeing higher benefits, the use of a broken formula tying benefits to wage growth, and an increase in life expectancy will soon splash red ink across the federal budget. The combination of these factors has increased lifetime Social Security benefits for a typical couple from $250,000 in 1960 to over $500,000 in 2010. [Read more about the deficit and national debt.]

Great for current beneficiaries, but unless I turn into Benjamin Button or win the lottery, I’m not going to retire in time to take advantage of these wonderful deals. Instead, one way or another, I’ll be left holding the bill. That $363,000 free lunch that today’s Medicare beneficiaries are receiving is anything but free. The costs are just being kicked down the road. But as Obama said two years ago, “We are now at the end of the road and are not in a position to kick it any further.” But after two more years of kicking the can, harder and further than at any time in history, I’ll be lucky if any of these government programs are around by the time I, well, kick the can.

It’s enough to make me downright grumpy in the face of all this New Year’s optimism. And although much of my generation doesn’t quite feel the same way as I do, without change, their anger is inevitable.

For a glimpse into our future, look across the pond to Britain. Their budget deficits have led to massive government cuts in entitlement programs, pension plans, and even education. It is an understatement to say that Britain’s young adults haven’t taken it too well. Riots have broken out among students—including attacking the royal family, damaging government buildings, and setting fires to private property—over a legislated increase in tuition as a result of yawning budget deficits. As one 15 year old student, Rodney McCarthy, said “we are going to stand up and we are going to fight back.” [Take the poll: Should Congress Raise the Debt Ceiling?]

He’s 15! When I was that age I was worried about girls, grades, and making the soccer team, not inciting a political movement against an austerity package. Nevertheless, I understand why he, and the rest of British youth are furious. Their fate was decided for them before they ever had a say in the matter. The same thing is happening here. The excesses of today’s government, where politicians consistently promise benefits without raising enough taxes to pay for them, creates the illusion of getting something for nothing.

That illusion will gradually fade. The curtain will be pulled back. So now that the ball has dropped and spirits are raised, pardon me if I don’t partake in the optimism.  

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