A TAX ON WORK FOR THE ELDERLY: MEDICARE AS A SECONDARY PAYER
November 15, 2007
Medicare as a Secondary Payer (MSP) legislation is a federal policy that creates disincentives towards working long careers or at least working beyond age 65. Medicare adopted its MSP policy in 1982; this legislation states that for individuals working at firms with 20 or more employees and otherwise eligible for Medicare benefits, Medicare serves as a secondary payer for health care expenses. The employer's health insurance is the first payer.
MSP was developed to better target health insurance for the elderly to individuals who did not have access to insurance from their employer. However, anti-crowd out measures often distort labor market behavior, and given high health care expenditures among the elderly, MSP creates a significant implicit tax on working beyond the age of Medicare eligibility, say researchers with the National Bureau of Economic Research (NBER).
By working at a firm that offers health insurance to its employees, workers are effectively foregoing their Medicare benefits, say the researchers:
- This creates a 15 to 70 percent implicit tax on working beyond age 65.
- Eliminating this implicit tax by making Medicare a primary payer regardless of an individual's employment status, along with eliminating other provisions that discourage long careers, could have a significant effect on lifetime labor supply.
- In addition, increased personal income tax revenues would likely offset the additional cost of providing Medicare benefits to the working population that is currently covered primarily by private health insurance from their employers.
The effect of the provision thus far is difficult to determine given periods of less stringent enforcement and the concurrent easing of the Social Security earnings test. However, given the high labor supply elasticities of older workers, eliminating the large tax on working that is created by MSP could potentially have a significant effect, say the researchers.
Source: Gopi Shahj Goda, John B. Shoven and Sita Nataraj Slavov, "A Tax on Work for the Elderly: Medicare as a Secondary Payer," National Bureau of Economic Research, Working Paper 13383, September 2007.
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