01/16/2012 08:51 am ET Updated Mar 17, 2012

Living on Social Security and Medicare: The Reality

Millions of retired Americans are frozen out of the health care system even though they've paid into it all their lives, because most of them rely on Social Security for the bulk of their income and can't afford the 20 percent of every medical bill that Medicare requires them to pay.

These numbers will grow enormously over the next 15 years as the population ages, whatever our economic future. Fundamental shifts in employment and incomes growing out of what's still being called the Great Recession will likely compound the problem for decades.

And demographic and other statistics strongly suggest that this is only the beginning of an unavoidable challenge to the idea of what it means to grow old in America, and to what many consider the obligations of government to citizens. In this pass, the political system seems unable to even concede the facts, much less design a practical response to them.

Understanding why means a slog through some numbers.

In 2009, about 23 percent of Americans collecting Social Security -- about 14 million people -- depended on it for at least 90 percent of their income. Another 50 percent, or about 30 million Americans, depended on it for half their income. Added together, that's 44 million, or 71.08 percent, of all retired Americans. In 2010, there were 61.9 million Americans 65 and older.

The average Social Security check is $1,164.30 a month; only about 12 percent receive $1,700 or more. The Congressional Research Service says that in 2007, the median value of all retirement accounts owned by households headed by persons between the ages of 55 and 64 was $100,000.

A 30-year Treasury pays 4.5 percent. That's $4,500 a year -- $375 a month -- and that number may be high. Many investments pay less -- most certificates of deposit, for instance, pay less than 1 percent, and the typical mutual fund has been losing ground since the '08 Crash. The Social Security Administration says the average income from assets for people 55 and over was $1,192 a year -- $99.33 a month.

So typical monthly retirement incomes are pretty low; the annual median income of all Americans 65 and above, in fact, is only $28,921.

Does everybody have so little to live on? No; if the median 401(k) is worth about $100,000, half are larger -- there are millions of Americans who won't face the worst of these problems.

But if we assume a normal, bell-curve distribution of those accounts, we can assume that the bulk of them are worth between $50,000 and $150,000 -- still peanuts, if you're going to live 25 or 30 years, in declining health.

At these income levels, there's money for housing, food, and gasoline -- period. Forget about premium cable and cruises; even visiting your relatives means months of planning.

Yet, Medicare rules say 20 percent of any medical bill -- the co-pay -- is the patient's responsibility. So for instance, if you had a double-cataract operation costing a typical $6,500, you'd owe a total of $1,300. Really serious operations cost much more--a coronary bypass, for instance, runs about $56,000 per artery -- an $11,200 co-pay.

If you're living on no more than $2,000 a month, paying 20 percent of those bills is simply impossible. You can't even afford the various insurance programs designed to pick up the slack. Even if the medics agree to payment terms for the co-pay, a simple $100 a month would be more than you could afford. And if you don't pay, they'll sell the bill to a collection agency that will go after assets like your house.

So as a practical matter -- not what should be, but what is -- most retirees are frozen out of a medical system designed to take care of them because they have to choose between necessities: It's your dinner or your life.

Arguments about how Social Security was never supposed to be more than a supplement to an individual retirement program are meaningless if those retirement programs barely take up the slack. And in any event, the entire premise of the retirement discussion in America is that people will hold one job at one company for a long time, building up the balance of their 401(k).

But this isn't the reality of most people today; the career of people approaching 50 or retiring today looks more like a list of jobs held at different companies for periods too short to vest in the 401(k). And in any event, the average median income of Americans aged 50 to 65 is only $46,650. Not much of a potential retirement program there.

And there's strong anecdotal evidence that even many highly qualified, highly paid professionals laid off in the Crash have run through their savings and 401(k) balances, just keeping their head above water. No more retirement program for them, either.

Meanwhile, young people hoping for professional careers need advanced degrees and serve at least one unpaid internship before getting an entry-level job -- with as much as $250,000 in debt. And most corporations start pushing people out the door after they turn 50. So likewise, no retirement program for them, unless they start making mid-six figures -- and stay there -- so they can create real investment portfolios.

As for what's coming: The Census Bureau says that there are about 106 million Americans aged 20 to 54. If we assume the same distribution of retirement incomes for them, then sooner or later, another 75 million or so Americans will be relying on Social Security for anywhere from 50 to 90 percent of their (smaller) income.

Since Washington seems to take for granted that Medicare benefits must likewise be cut, and the co-pay will have to rise, that means that going forward, even more Americans will be frozen out of the medical system.

How's that for a death panel?

It needs to be said at this point that the co-pay idea wasn't some evil plot to kill off the elderly; it was designed to control health care costs -- the idea being that if people had to pay part of the bill, they wouldn't abuse the system by going to the doctor for a hangnail.

On the other hand, the Medicare rules were designed in the 1960s, before medicine began stretching life expectancies, and when medical costs were much lower. Long/short, the rules just weren't intended for the facts we face today -- much less the facts we'll be facing tomorrow.

And that's where things get really dicey, because the impact of computers on employment, combined with demographics, are about to sap government financing on the one hand, and goose the number of those frozen out of the system on the other.

We finance government by taxing salaries, partly because it's government policy to encourage entrepreneurship and risk taking, and partly because legislators do more for their contributors than for their constituents -- to put it another way, because they think the people who finance their campaigns are their real constituents.

So to finance the government, we need people to be working. After all, one of the reasons for our huge deficits since the '08 Crash has been because high unemployment cut revenues and goosed demand for government services.

But one of the oddities of today's economy is that unemployment remains high, while corporate balance sheets are strong. And the stock market apparently believes they'll stay that way.

In other words, the recession is pretty much over for companies, but not for the unemployed. And one reason companies aren't hiring is that they've discovered they can get their surviving employees to work harder for less money, and replace many others with machines that never take a family day and have no health care plans.

This is less an evil conspiracy than a long-term trend, based on the reality that almost every job can be computerized, and that in a computerized, globalized world knit by satellite communications, jobs go to the low-cost provider -- anywhere in the world.

So it's just common sense to conclude that a lot of what used to be high-paying American jobs just aren't coming back. And since household income has fallen steadily since its peak in 1999 -- by a total of 7.2 percent -- the long-term trend tells anyone willing to look at it that tax revenues will keep falling even if the economy returns to mid-1990s vitality.

This trend is only aggravated by other long-term trends affecting both the general population, and the government's ability to finance itself.

For instance -- to repeat myself -- reality for today's college graduates is a long education; a string of low-to-non-paying internships; very large debts that have to be paid off and minimize what they can save; and then getting pushed out the door at 55 or so. Not to mention several different careers, each sending people back to the end of the line. Net/net: Not much of a shot at building a nest egg before you're put out to pasture.

And that's for college graduates; people unlucky enough to be born to parents who can't send them to grad school and support them through those internships will face an even more unappealing future. And neither group will be able to save much for retirement -- suggesting that in the future, even more than 71 percent of retired Americans will be outside looking in when it comes to medical care.

But they'll have one thing in common; even while they're working, both groups will be struggling to pay their own bills and just be too strapped to help their parents. No matter how much they may love them, they're going to be expecting Social Security and Medicare to be there for them -- intact. They'll insist on it.

But in this pass, reducing medicine's administrative costs by using a single-payer system is a complete non-starter in Washington, even though private insurer administrative overhead is commonly said to be about 30 percent, and Medicare's, 10 percent.

Meanwhile, the effect of evaporating employment on a government that gets most of its revenues taxing salaries raises fundamental questions: 'How can you finance government when you have no tax base?', leads to, 'How do you provide government services without revenues?' The implications of those questions for the subject of this essay are unappetizing, at best.

These questions raise some really disturbing scenarios, because they imply a large class of the permanently unemployed, young and old, educated or not, with nothing to lose. In a word, Egypt. And since, as a simple matter of public safety, these people can't be left to shift for themselves, the question going forward becomes, 'How do we keep the lid on?' This is a long way from 'How do we minimize government to maximize individual liberty?'

In fact, this prospect is a direct threat to the very idea of what it means to be an American. But in this pass, we have no policy -- or inkling of a policy -- to deal with the problem. Instead, the entire conversation is about how to save the government.

The People that government is supposed to be of, by, and for? Get real. And as I've said many times, any politician who raises these issues seriously will be out of a job in a few weeks.

This is setting up an impossible situation that brings to mind something Winston Churchill used to say: "Americans can always be counted on to do the right thing -- after they have exhausted all other possibilities."

We'll solve this mess eventually -- we have to. But as things stand, a lot of Americans who've worked hard all their lives and played by the rules are going to pay quite a price while we decide what to do.

So the question is: Are we really willing to watch our parents and grandparents die because our leaders won't face reality? And what are we going to do about it?

Visit my website: Reinbach's Observer