Credit: Illustration by Martin Kozlowski

Michael Kamins is director of research and professor of marketing in the College of Business at Stony Brook University. Duffy Mich is principal of Left Right Research, a Ronkonkoma-based market research firm.


As the congressional super committee sets about its task of cutting $1.2 trillion in spending over 10 years, it will almost certainly have to address Social Security and Medicare. But garnering support for changes will be made difficult by the fact that the majority of Americans don't understand the simple mathematics behind those systems.

In a newly released Stony Brook University survey of approximately 7,000 Americans, more than 81 percent believed that they had contributed as much or more to Social Security than they will get back in their lifetime to Social Security. The numbers approached 80 percent with respect to Medicare.

Americans are equally oblivious when it comes to knowing the dollar amount they actually contribute to these two entitlement programs, despite this being delineated right on their paychecks.

When asked about how much they believed they had contributed to either Medicare or Social Security during their best paid year, more than two in five individuals were wrong by 50 percent or more regarding Social Security payments. And their estimates concerning Medicare were off the charts: approximately 30 percent of respondents miscalculated by a whopping 100 percent or more. Before the current payroll tax holiday, workers were giving 6.2 percent of their federal taxable wages to Social Security, up to a maximum of $106,800 annual salary; it's now 4.2 percent. And 1.45 percent of salary goes to Medicare.

It may not be obvious how being wrong in one's calculation of lifetime contributions to Social Security or Medicare can matter. But the issue becomes more serious when you consider that citizens are consistently wrong. They routinely overestimate the amount of their contributions, which leads to a strong sense of entitlement, a rise in anger if their entitlement is not met, and a significant distrust of the government.

Talk to many senior citizens these days and you hear: "I paid into it my whole life and I'm entitled to it." Since people don't really understand how little money they pay into Medicare in particular, they seem to think there's a large bucket of money, with their name on it, to pay for medical bills throughout their retirement years.

But, for most retirees, that is simply not true. For example, assume you started working in 1965, making $13,000 per year. You averaged about 3.5 percent in annual raises, and your salary at retirement 40 years later was $51,500; this would put you in the middle of the income spectrum. Your direct contribution to Medicare over all of these years was only $14,126, and your employer matched that amount for a total of $28,253. If these funds were loaned to the federal government, as they were for most years, and earned the going rate for T-bills during that time, the original $14,126 would have increased to $44,350, plus the employer matching funds for a total Medicare contribution of $88,700.

How long will that last? Depending on your health, it could last a long time -- or it could be gone in no time. Given the escalating costs of health care these days, we're putting our money on the latter. For retirees in OK health, taking some number of medicines but not needing surgery or hospitalizations, health care costs are probably $10,000 to $12,000 per year -- so that $88,700 would last about eight years. But, if you retired at 65 and lived to an average age of 78 or 79, that leaves five or six years without the necessary funds.

If you need heart-bypass surgery, joint replacement, cancer treatment or any other serious medical services, that $88,700 is gone almost immediately.

As soon as your contributions are spent, you become a net taker from the Medicare pool. Who makes up the slack? The government, of course.


Social Security is better funded, but it too comes up short when you consider the impact of longevity, non-working spousal benefits, supplemental security income and other elements of the program. Overall contributions are less than benefits by $50 billion for 2011, an amount that will continue to increase for the foreseeable future.

Few people understand this math. As a result, they continue to believe that they are entitled to benefits for which they never paid. And it is virtually impossible to have a serious discussion about these entitlements if the public has the facts wrong.

So there's a strong need to educate the public about how money is contributed to this system, which is bleeding money faster than it is accumulating it. That's the first step toward getting the political support that will be needed to re-evaluate it.

We have been made well aware that Medicare benefits may be quickly disappearing and Social Security is not far behind. Yet consumers mistakenly believe that they have done their job by contributing enough to keep both entitlements afloat in their lifetimes. This, of course, is the source of many different theories, some catastrophic, some conspiratorial and some anti-governmental by those who assume the government has misappropriated the money. They don't understand that it's an input-output issue.

The problem may simply lie at the feet of the media, elected officials and other leaders who just haven't conveyed to the public the simple mathematics: either contributions into both systems will have to be increased; output from both systems will have to decrease; or both will have to happen at the same time.

The Social Security Administration used to mail a simple annual form, telling each of us how much we earned each year and how much we contributed to Social Security. While this wasn't intended to compare inputs versus outputs for the entire system -- something we sorely need in a form even a goldfish can understand -- it should have served at least to inform the public about their own contributions. But, unfortunately, those mailings were suspended for budgetary reasons this year.

Besides, that was just a small step when a giant leap is needed. Our schools, elected officials and the media need to provide and disseminate such data -- how much we're bringing in, how much we're paying out -- as well as teach those making inferences how to use it.

Over the past couple of months, everyone has been willing to weigh in on the raging debt debate and how it will impact Social Security and Medicare. We need to have a clearer understanding of what we've been raging about.