The Power of Marketing

Wait a minute? You expect Ajax to foam and clean? That’s outrageous!

James Kwak is amazed that people might think that Medicare was an earned benefit:

Imagine Alice works from twenty-five to fifty-five making $30,000 per year, more than double the minimum wage. Then she loses her job and goes on Medicaid—a classic “welfare” program. Then imagine Beatrice, who works from twenty-five to sixty-five making $30,000 per year. (For simplicity, let’s assume each person goes on benefits in 2012, and those $30,000 are constant 2012 dollars.) Then she retires and goes on Medicare—an entitlement she has “earned,” according to Tea Party logic. Assume that each person paid $1,000 in federal income taxes each year. Who’s the freeloader?

Each year, Beatrice paid $870 in Medicare payroll taxes. In addition, about 16 percent of her income taxes went to Medicare,** for another $160 per year. So over forty years, she contributed about $41,000. At retirement, she will have a life expectancy of about twenty years. Annual Medicare spending per beneficiary is projected by the CBO to be about $15,000 in 2022 (right in the middle of her benefit period), or maybe $12,000 in 2012 dollars, so she can expect to receive total Medicare benefits of about $240,000. That means her net transfer is about $199,000, or $10,000 per year.

About 21 percent of Alice’s federal income taxes go to Medicaid,*** so she contributed $210 per year, or about $6,000. (Let’s assume she paid no state taxes, which makes her look worse.) Total federal Medicaid expenditures were $273 billion in 2010; the federal government pays 57 percent of total Medicaid expenses; and there are about 56 million beneficiaries at any one time; so the average cost per full-year beneficiary is about $8,600. 49 percent of Medicaid spending, however, goes to long-term care, even though only 7 percent of Medicaid beneficiaries received long-term care benefits,**** so the average annual cost per non-long-term care beneficiary is about $4,700.***** So between the ages of 55 and 65, Alice’s total benefits are worth $47,000, for a net transfer of $41,000, or $4,100 per year. Even if we double her average cost because of her age, we still get net benefits of $88,000, or $8,800 per year.

By now, the answer should be obvious. From the perspective of net benefits, they are both freeloaders.

Or, said more simply, for the last forty years Medicare has been marketed to the American people as an earned benefit despite the reality that their contributions don’t by any stretch of the imagination pay what they can expect to receive in benefits. I’m shocked, shocked that they could come to that conclusion.

Extra credit question: if Medicare had never had a specific payroll deduction for it but had always just been paid from general revenues would it have become one of the most popular federal programs?

13 comments… add one
  • Drew Link

    Of course there is an entirely different way to look at the whole situation: people should live within their means and plan their financial affairs accordingly.

    Nah. That would come too close to responsibility, vs entitlement, and we wouldn’t want that.

  • PD Shaw Link

    Doesn’t this hypothetical go off the rails at “***” ?

    Alice makes $30,000 a year; she quite possibly is paying no federal income tax, but if she is, she certainly is not paying $6,000 a year. She’s in the 15% tax bracket if she doesn’t claim any exemptions, deductions, credits, etc.

    I don’t think Alice is a freeloader, I just think that she doesn’t pay hardly any income taxes; she is a recipient of transfer payments from those who do, which is fine.

  • The $6,000 is over 30 years (~$200/year X 3o years). The hypothetical posits (by my reckoning) income taxes of about $1,000 per year.

  • Brett Link

    @Dave Schuler

    Extra credit question: if Medicare had never had a specific payroll deduction for it but had always just been paid from general revenues would it have become one of the most popular federal programs?

    I think it simply never would have made it out of Congress. No doubt part of LBJ’s argument for it was that it would “pay for itself”, sort of like how Social Security had the same set-up with special deductions.

    I’ve always thought it was absurd to have a health care welfare program separately for the elderly. Just have a single health care assistance program for all poor people, elderly and otherwise.

  • PD Shaw Link

    I guess my other question is where how he figures 21 percent of Alice’s federal income tax payments go to Medicaid?

    “Medicare, Medicaid, and the Children’s Health Insurance Program (CHIP) — together accounted for 21 percent of the budget in 2010. Nearly two-thirds of this amount, or $452 billion, went to Medicare, which provides health coverage to around 47 million people who are over the age of 65 or have disabilities”

    http://www.cbpp.org/cms/index.cfm?fa=view&id=1258

    So, its more plausible that 7 percent of all federal spending goes to Medicaid, but that doesn’t mean that 7 percent of individual income taxes goes to Medicaid, since the spending is also paid for by other taxes and by borrowing.

    And with a majority of income earners not paying any federal taxes outside of FICA, the whole thing strikes me as an implausible hypothetical. This report indicates that the second income quintile , in which her $30,000 income places her, has an average effective income tax rate of negative 4.1%.

    http://www.taxpolicycenter.org/numbers/displayatab.cfm?DocID=2432

  • Sounds like he misread the stat.

  • Medicaid is welfare. Medicare is welfare.

    There, end of discussion.

    Why was this hard?

  • The question that Kwak is asking is why do people think otherwise? My answer: because that’s the line of goods they’ve been sold for the last 40 years.

  • steve Link

    It is made up to make a point, but in reality adults w/o children are not eligible for Medicaid in lots of, if not most, states.

    “people should live within their means and plan their financial affairs accordingly.”

    Assume Medicare did not exist. Private insurance costs more than Medicare, so assume $20k per year for health insurance. Assume 20 years of life post-65. Assume her savings need to pay, no SS, for daily living expenses. How much does this woman need to save from her $30k/year? Is it realistic? (If she has any kind of illness, that insurance will double BTW.)

    Steve

  • PD Shaw Link

    Medicaid is a transfer payments program that redistributes resources to those who can’t afford it.

    Medicare is a social insurance program that is not actuarially sound. Its premised not on return of payments, but on the reality that many will not live long enough or die under the right circumstances to serve as a risk pool for those who do.

  • PD Shaw Link

    steve, I also think the other reality is that fifty-five to sixy-five year old Alice is not going to reflect the typical benefits payout in Medicaid. There are a lot of younger people on Medicaid, or whose only potential coverage is Medicaid, that are allowing him to make that claim.

  • Well, I think if medical costs hadn’t increased by 2-3x the rate of inflation for the past several decades, we wouldn’t be having this discussion.

  • Assume Medicare did not exist. Private insurance costs more than Medicare, so assume $20k per year for health insurance.

    But would it if Medicare did not exist? You are assuming that absent a huge portion of government health care expenditures on some of the highest consumers that health insurance would be just as costly today.

    Okay, if we are in the world of calculus and making infinitismal changes I might go along with this. But you are talking about a huge mother f*cking change…and it has no other impacts.

    Earth to steve…steve….come in steve.

    I’m sorry Dave, but I think he has passed beyond our ability to communicate with him. :p

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