High-income seniors, it’s time to pay up for Medicare coverage

I’m pleased to learn that the super committee is seriously contemplating having higher income senior citizens pay more for their Medicare coverage (Kaiser Health News: Affluent seniors could take a hit on Medicare). I’m also intrigued that such a policy appears to have broad support from the public and policymakers at a time when regressive flat tax policies are in vogue and when the Bush tax cuts on high earners are expected to be renewed.

Medicare is financed in a regressive manner. Everyone pays a fixed percentage of wages toward Medicare. That includes many working poor who can’t afford health insurance themselves, yet subsidize health coverage for Medicare recipients of various income levels. High income people pay the same percentage of their wages into the system as low earners ’so this is essentially a flat tax. However, Medicare tax is not collected on capital gains, which comprise a significant portion of the incomes of high income people. In practice this means low income earners pay a higher percentage of their incomes into Medicare than those who make the most.

Why is it that people seem willing to raise revenue from high-income Medicare beneficiaries when there is a reluctance to impose higher taxes on high-income people in general? Here are a few thoughts:

• Although raising Medicare premiums is essentially a tax increase, it can be presented as a reduction in subsidies, which is more palatable
• The working age population is very familiar with the concept of rising employee financial responsibility for health care at all income levels, so it seems natural to extend that concept to retirees
• There is (finally!) an understanding that Medicare is bankrupting the country and that we need to do something to keep costs down
• The Ryan plan, which calls for providing subsidies to Medicare beneficiaries to purchase insurance, has given people a sense that this kind of change is coming
• While people may generally buy into the vague (and in my view, false) notion that taxing high earners will reduce entrepreneurship and investment, they don’t think it applies to retired people

The Kaiser Health News article includes a couple of disingenuous arguments from the National Committee to Preserve Social Security and Medicare:

• “When you’re talking about seniors, the definition of wealthy seems to be a whole lot lower than when you’re talking about younger people”
• “Unlike Social Security, there is no cap on the annual income that is subject to the Medicare portion of payroll taxes paid by working Americans”

The problems with those arguments are as follows:

• The proposals are based on income levels, not wealth, which makes sense because it’s much easier for the government to measure individuals’ incomes. A retired person with an income of $150,000 is likely to have much higher wealth than someone who’s 40 years old making the same amount. I have no problem asking such folks to dip into their savings to contribute to Medicare
• It’s true there’s no cap on annual income subject to the Medicare tax. But that’s only been true since 1994. Most Medicare beneficiaries spent the bulk of their working lives under an annual Medicare wage cap