Early Retirement

Study #247 - Government Spending on the Elderly: Social Security and Medicare

Despite all the recent attention paid to Social Security’s long-term fiscal insolvency, Social Security is not our biggest problem. Health care is. Indeed, health care spending will outpace Social Security spending by the time today’s teen-agers reach the retirement age, according to intermediate assumptions. If the pessimistic projection proves to be true, health care spending will surpass spending on Social Security during the baby boomer retirement years.

The reason for the financial crisis in America’s elderly retirement programs is that they are based on pay-as-you-go finance. All payroll tax revenues are spent - the very minute, the very hour, the very day they are received by the U.S. Treasury. Most of these revenues are spent on benefits for current retirees. Any additional amount is spent in other ways or, more recently, to pay down the national debt. But there is no funding of future benefits. No money is being stashed away in bank vaults. No investments are made in real assets. Pay-as-you-go means taxes taken from today’s workers pay for benefits government provides to today’s retirees. When today’s workers reach the retirement age, their benefits will be paid only if higher taxes are collected from the next generation of workers.