It's not surprising that we can't pass a bill to address long-term budget deficits. Effectively all of the growth in projected long-term budget spending is health care costs tied to Medicare benefits. And -- surprise! -- voters really like Medicare benefits. According to a 2010 poll by the Tax Policy Center, three-quarters of Americans think entitlements like Medicare will create major economic problems over the next 25 years. But two-thirds oppose reducing benefits, and more than half oppose raising taxes.
Here's why: Medicare isn't just a good deal for retirees. It's an outstanding deal.
According to the Urban Institute (link opens PDF), a couple with average wages retiring at age 65 in 2010 would have paid $88,000 in dedicated Medicare taxes over the course of their lifetimes (including their employers' share) but can expect to receive $387,000 in Medicare benefits. A 65-year-old couple retiring in 2020 will have paid $111,000 in Medicare taxes and can expect to receive $427,000 in benefits. These figures are adjusted for inflation and discounted to present value using a 2% real rate of return. It's likely that the returns earned on Medicare taxes will exceed what an average investor earns in the stock market (at the expense of someone else, of course) over the course of their lives.
Medicare taxes for most workers are currently 2.9% of income, where they've been since 1986. But median wages during that time grew by an average of 2.8% per year, while medical costs grew by an average of 5.5% per year. In order to have kept an equal ratio of Medicare taxes to Medicare expenditures over the last three decades, either taxes would need to have doubled or expenditure growth would need to have been cut in half. But remember the Tax Policy Center poll: Voters by and large refuse both options. This is why we have deficits. It's one thing to talk about the immorality of kicking the can down the road to future generations, but it's another to actually stop kicking. Cans feel really good to kick.
That sentiment will probably grow in the future. In 1970, 10% of the U.S. population was age 65 or older. Today that's 14%, and by 2030 nearly 20% of the economy will be eligible for Medicare. How do you think these people are going to vote? Will they easily give up their investment-of-a-lifetime Medicare benefits? I doubt it.
There are a few likely ways this will end. Raising the age at which you become eligible for benefits is one of the more palatable options, but it doesn't do much to the deficit, as a disproportionate amount of health care costs are incurred when people are in their 70s and 80s. Growth in health care costs is coming in below what budget analysts expected. If that trend holds, most of the runaway-spending budget forecasts could be proven too pessimistic. More likely, Medicare growth will come at the expense of other government programs -- nondefense discretionary spending is already on track to hit a 50-year low as a share of GDP.
But here's what we know: The budget isn't hard to fix because politicians are evil or because one political party "doesn't get it." It's hard because what drives long-term deficits are programs that offer voters deals they can't refuse. Just pay a little now, and we'll give you a lot tomorrow -- who can turn that down? It's a dangerously good deal.
Morgan Housel doesn't own shares in any of the companies mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.