A MEDICARE REFORM PROPOSAL
December 21, 2007
A novel way to deal with Medicare's deteriorating finances is to create Health Insurance Retirement Accounts (HIRAs). Through these accounts current workers will partially prepay future Medicare costs through a fixed percentage of their total wage income and thereby reduce the projected tax burden on future workers, say Andrew J. Rettenmaier and Thomas R. Saving, senior fellows at the National Center for Policy Analysis.
Under this reform:
- When they enroll in Medicare at age 65, beneficiaries will use their HIRA balances to purchase an annuity paying an annual fixed sum to a spending account, such as a Roth Health Savings Account (HSA).
- Beneficiaries will use their HIRA annuities to pay for a share of their Medicare costs and any funds remaining at the end of the year can be withdrawn tax free (like a Roth IRA) and spent on nonmedical goods and services.
- The annuities will replace government spending obligations, and as they grow through time they will relieve an increasing amount of the burden on future taxpayers that would exist under the current financing arrangement.
- The new economic incentives for patients to become more prudent consumers of health care will further reduce the funding burden on the next generation by reducing both the level and rate of growth in health care spending by retirees.
Under reasonable assumptions:
- By mid-century, reformed Medicare spending is estimated to be 20 percent to 35 percent less than the current program.
- By mid-century or earlier, total spending on the reformed program, including contributions to HIRAs, is estimated to be less than the spending on the current program.
This reform proposal should appeal to reformers across the political spectrum because it reduces the tax burden on future workers, puts Medicare on a sounder footing, retains the progressivity of the current program's funding, and produces cost sharing incentives that rise with lifetime income.
Source: Andrew J. Rettenmaier and Thomas R. Saving, "A Medicare Reform Proposal Everyone Can Love: Finding Common Ground among Medicare Reformers," National Center for Policy Analysis, December 2007.
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