Yet Another Tax on Old Age

Commentary by Pete du Pont

After a rancorous year-long debate over how to solve the financial crisis facing the Medicare trust fund, it appears that Congress and the president have a compromise that would call for slowing Medicare's rate of growth by somewhere around $115 billion over six years.

As yet, there is no agreement on the details of how that money will be saved, but the two principal proposals are not encouraging.

One is to tighten the screws further on Medicare reimbursement to doctors and hospitals. In other words, price controls. They have not worked in the past and merely postpone the day of reckoning for Medicare.

The second idea being considered is to force wealthier people to pay higher Part B premiums. Unfortunately, this proposal would do nothing to solve the financial collapse facing the Medicare trust fund, it would penalize our most productive seniors, and it would undermine the very nature of the Medicare program.

Medicare is made up of two parts: Part A pays primarily for hospital expenses and home health care, and Part B -- known as the Supplemental Medical Insurance (SMI) program -- pays physicians' fees and outpatient service charges.

Part A is funded by a 2.9 percent payroll tax that is deposited in a trust fund used for seniors' Part A expenses. This is the trust fund that trustees estimate will go broke by 2001 unless something is done.

Medicare Part B, by contrast, is a voluntary program that charges a monthly premium which is deducted from the recipient's Social Security check. Currently, about 85 percent of Medicare's 37 million beneficiaries enroll in Part B, paying a monthly premium of $43.80. This covers only 25 percent of the program's costs -- down from 1995, when beneficiaries paid nearly a third of the costs. The federal government pays the remainder out of general revenues.

One plan currently under consideration would double the Part B premium for senior individuals with incomes of more than $60,000 per year and couples with incomes of more than $80,000. The Congressional Budget Office (CBO) estimates such a proposal would raise $9 billion over five years.

But the additional money would go toward Part B, and would do nothing to solve the most immediate problem, the impending bankruptcy of the Part A trust fund. Instead, if enacted, the proposal would further discourage seniors from being productive in their retirement years.

Consider the impact on earned income and work of an increase in the Part B premium. Congress has already imposed two extra taxes on the earnings of retirees -- an earnings test for those under 70 and a benefits test for all Social Security recipients.


The earnings penalty reduces Social Security benefits by $1 for every $2 of wage and salary income above $8,640 a year for those ages 62 through 64, and $1 for every $3 of earnings in excess of $13,500 for those ages 65 through 69.

Single seniors with incomes above $25,000 a year (including otherwise tax-exempt income and half their Social Security benefits) and couples with incomes above $32,000 must pay income tax on 50 percent of their Social Security benefits; and with incomes above $34,000 for individuals and $44,000 for couples, on 85 percent of benefits.
As a result of these taxes, some seniors pay more than a dollar for each additional dollar they earn, so that their net income actually decreases when they work for pay. Forcing many of those same seniors to pay yet a third tax -- an additional Medicare fine -- on their retirement benefits would discourage workers further from saving during their working years for their retirement ("The government's going to take it all anyway"), and would discourage them from being productive after retirement.

Imposing a means test is a way to slowly, but fundamentally, alter the nature of Medicare without a serious public debate about its future. When President Lyndon Johnson signed Medicare into law in 1965, he specifically wanted to avoid giving the impression that it was a welfare program. While it is reasonable to talk about who should be paying how much for what, that discussion should take place in the broader context of fundamental and permanent Medicare reform.

While Congress needs a solution to Medicare's growing financial woes, imposing a third tax on high-income seniors won't solve the problem. Furthermore, if we penalize those who save during their working years and are productive in their retirement years, we will discourage that behavior -- robbing America of both the economic benefits and the social benefits that come with an active senior population.