Do You Get the Medicare You Paid For?

The federal government spent $7 trillion and borrowed almost $2 trillion last fiscal year. That is about $4 trillion more in spending than three decades ago after adjusting for inflation. While spending has risen across the budget, Medicare stands out as a key driver, accounting for nearly 20 percent of the increase.¹ Getting federal spending under control means reining Medicare outlays in.

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When we share these facts, the most common objection is that Medicare is different because “I paid for it.” Every dollar spent comes back in the form of a benefit, the thinking goes. Of course, anyone who pays any federal tax has helped pay for all federal programs, but we don’t think that’s what people have in mind. What makes Medicare unique is that it is partially funded by a payroll tax paid by workers and their employers.

The operative word there is “partially.” Today we look at how much Medicare you get for what you pay in.

The plot

This week’s plot compares expected lifetime Medicare benefits for a person turning sixty-five in 2025 to the Medicare payroll taxes (plus interest) they paid over their career. The comparison is shown across average lifetime earnings, wage-indexed to 2025 levels.

The plot may come as a surprise to the “I paid for it” crowd. Few recipients pay enough Medicare payroll taxes to fund their expected benefits. Someone with average lifetime earnings of $50,000 can expect to receive about four dollars in Medicare benefits for every dollar of Medicare payroll taxes paid. A worker with annual wages of $100,000 on average—roughly $30,000 above the average wage in 2025—would still receive more than two dollars in benefits for every dollar paid. You would need to average at least $220,000 annually over your career before your Medicare benefits equal what you paid in.

The reason benefits exceed taxes is simple: Medicare payroll taxes were never meant to fully fund Medicare. Those taxes cover only inpatient hospital care under Medicare’s Hospital Insurance (HI), or Part A. The rest of Medicare—the parts that pay for doctors’ visits, outpatient care, and prescription drugs—is financed through a mix of general fund revenues and enrollee premiums. But premiums cover only about one quarter of the costs. The remainder is funded the same way the government pays for Medicaid, the Affordable Care Act, and most means-tested programs: through federal income taxes or federal borrowing.

Making matters worse, the Hospital Insurance taxes we have paid in will not cover HI spending for much longer. Medicare’s trustees project that by 2033, the HI Trust Fund will be depleted, meaning all revenue and interest ever collected for the program will have been spent on it. At that point, projected revenue will cover only 89 percent of expected costs.

The point

None of this means that Medicare is a bad program. The problem is the reflexive opposition to any reforms that would slow down Medicare’s spending growth because voters think, “I paid for it.” We haven’t. A system where almost everyone receives more than they contribute cannot continue forever without excessive federal borrowing and, ultimately, higher taxes.

Last year, we reviewed Medicare’s long-term budget projections at Tom’s Substack. The budget math isn’t pretty. Just over the next ten years, we estimate that Medicare will add over $8 trillion to the federal debt. To prevent that, we need an honest conversation about Medicare’s long-term sustainability. The question isn’t whether current or future retirees “deserve” their projected benefits. It’s whether future generations can afford them.

Further reading

Are there solutions to rising Medicare costs that could lessen the strain the program places on the federal budget? The Hoover Institution’s Fiscal Policy Initiative and its Healthcare Policy Working Group are developing rigorous, research-based policy solutions to meet the nation’s health and budget challenges.

Plot calculations

Lifetime Medicare benefits are the sum of the average amount the federal government is expected to spend per enrollee over a sixty-five-year-old’s remaining life, discounted to today.² The value is $343,000 in 2025. Of course, this is just an average. Some will live longer and get more out of Medicare; others might die earlier or be unusually healthy. Our calculation uses life expectancy estimates for men at age sixty-five. Since women live longer on average, their calculated benefit would be higher. We are also not accounting for government subsidies that provide premium and cost-sharing support for low-income Medicare recipients, nor any benefit for those eligible for Medicare before age sixty-five because of a disability. We’re also assuming that the impending insolvency of the Medicare HI Trust Fund doesn’t affect benefits.

Total payroll taxes paid are based on the estimated Medicare payroll taxes paid each year by workers and their employers, plus accumulated interest at age sixty-five. We’re assuming everyone’s wages grew at the average wage rate throughout their working years. Effectively, this means we are assuming a person’s wage as a percent of the national average wage stays constant during their career. We performed a sensitivity check using the Social Security’s scaled factors, which better reflects the age-earnings profiles of a typical worker. The net present value of payroll taxes paid at age sixty-five falls slightly, but the differences are minor. Our calculations do not include Medicare revenues from the taxation of Social Security benefits for higher-income beneficiaries, nor do they include the income-related premiums that higher-income Medicare recipients pay in addition to standard premiums.

Daniel Heil is a policy fellow at the Hoover Institution whose focus is on the federal budget, tax policy, and the federal antipoverty programs. He participates in Hoover’s Healthcare Policy Working Group and Fiscal Policy Initiative.

Tom Church is a policy fellow at the Hoover Institution. He studies health care policy, entitlement reform, income inequality, poverty, and the federal budget. He and Daniel Heil are co-authors of “Choices for All,” a set of commonsense health care reforms. He participates in Hoover’s Healthcare Policy Working Group, Fiscal Policy Initiative, and Tennenbaum Program for Fact-Based Policy.

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