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Here's How Much the Old Are Taking From the Young

Rick Newman
·Senior Columnist
CHICAGO, IL - NOVEMBER 07: Senior citizens protest against cuts to federal safety net programs, including Social Security, Medicare, and Medicaid on November 7, 2011 in Chicago, Illinois. About 40 of the demonstrators were arrested, cited, and released after they blocked a downtown intersection and refused police orders to move. (Photo by Scott Olson/Getty Images)

Grandma’s gettin’ greedy — or so some people might say.

New data published by the Congressional Budget Office show elderly households receive far more in government benefits than they pay in taxes, while all other households pay more in taxes than they get back. The data are from 2006, the most recent year the necessary numbers were available. The general findings aren't surprising, since people stop working and paying payroll taxes when they retire, and Social Security and Medicare are chiefly meant to benefit the elderly in the first place.

But the benefit gap between elderly and non-elderly households may seem lopsided to some. The popularity of programs such as Medicare and Social Security shows the U.S. has met the goal, originating in the 1930s, of building a robust safety net for seniors and others unable to fully support themselves. But demographics have changed dramatically since those big entitlements went into effect, with fewer young people now financing the benefits received by many more older people. Many feel the imbalance amounts to generational theft, as a disproportionate and growing share of national wealth goes to supporting the lifestyles of the elderly rather than cultivating future generations.

Here are the numbers:

Spending per household includes entitlement programs plus most other categories of federal spending, such as education, transportation and national defense. It doesn’t include state and local spending, however, which would even out the numbers somewhat, since that money tends to go toward education and local services not necessarily geared toward the elderly.

Those two negative numbers in red show that, on average, all households other than the elderly pay more in taxes than they get in federal benefits. There are exceptions, since low-income households get more than they pay and vice versa, but that puts an even heavier burden on working, middle-class families that don’t qualify for many federal benefits.

Since the numbers are from seven years ago, they may not precisely reflect what’s going on today. Entitlement payments to seniors have remained stable during the past several years, but the recession depressed tax payments by many families, and stimulus programs, such as extended unemployment aid, pushed more benefits to non-elderly families. Still, many of those changes were temporary, so if the spending gap narrowed for a few years, it’s probably likely to widen again. Plus, the retirement of the baby boomers and an expected surge in entitlement spending will make the gap even wider in coming years.

Many seniors, of course, feel they’ve earned the government benefits they receive, since they paid into the system for years while they worked. But that’s only partly true. Entitlement programs are not set up as private savings accounts in which individuals get back what they put in. The money comes from transfer payments: People paying taxes today fund the benefits people are receiving today, as has always been the case.

For Social Security, a typical 65-year-old today will receive roughly the same amount in benefits that he or she paid into the system during a lifetime of work. But the same person will receive 250% to 400% more in the value of Medicare benefits than he or she paid in. That’s for two basic reasons: First, people are living longer, so somebody who retires today paid into the system when life expectancies, and average Medicare costs, were lower. Second, the cost of healthcare is rising much faster than inflation, so Medicare’s average and total costs are skyrocketing.

An overlooked benefit

The topic of “generational transfer” can be a testy one, but one factor that helps everybody tends to get overlooked: Benefits that go to seniors can be a major relief to their kids and grandkids, who might get stuck footing many extra bills if Uncle Sam weren’t there to help. In that regard, generational transfers also happen when middle-aged people find themselves supporting their aging parents out of their own pockets.

Yet the large and growing portion of federal revenues being paid into entitlement programs — especially Medicare — will put an enormous burden on younger generations eventually, through much higher taxes and cutbacks in the benefits they themselves receive, unless there are major reductions to Medicare or Social Security or both.

There may be other costs to funding an increasingly expensive safety net for the elderly. If mandatory spending on seniors blocks government investment in other things, such as education or infrastructure, it could harm the competitiveness of the whole U.S. economy enough to push everybody’s living standards down. And if the next generation of taxpayers falls further behind, that will hurt everybody.

The old need the young more than they may realize, just as the young once depended on their elders.

Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success . Follow him on Twitter: @rickjnewman.