NCPA - National Center for Policy Analysis

Turning Medicare into True Social Insurance

August 3, 2012

Medicare benefits will be in jeopardy if policymakers do not act soon to restructure the program. Indeed, either tax increases for the working class or automatic reductions in benefits will be necessary to support Medicare's growing cost. The solution may be to update and improve income adjustment so that seniors that really need Medicare are the ones that get access to it, says Kathryn Nix, a policy analyst at the Heritage Foundation.

A lot has changed since the 1970s -- when the program was first introduced -- and that necessitates a restructuring of the Medicare program.

  • In 1970, 20.4 million Americans were enrolled in the Medicare program and the cost was $7.5 billion per year.
  • By 2011, these figures had risen dramatically: enrollment was close to 49 million with an annual cost of $549 billion.
  • Similarly, in 1970, the median income of citizens that were age 65 and older was $17,528, yet by 2010, the median income of citizens age 65 and over had increased to $31,408.

Given these figures, the idea that all seniors need a safety net may no longer be true. For example, in 2010, only 9 percent of citizens age 65 and older were in poverty. Furthermore, according to a 1997 study conducted by the National Bureau of Economic Research, wealthy beneficiaries consumed a larger part of Medicare funding due to the fact they have higher expenditures and longer lives.

Income adjustment is a primary avenue for reducing Medicare deficits in the long-run. Combined with a premium support model, the wealthy would receive reduced benefits but would also have access to a marketplace where they can shop for better options.

This plan would also index the lower income threshold for seniors to adjust for inflation so that the number of seniors receiving less assistance would grow more slowly through the years. Furthermore, the proposed changes would create predictable premiums for Medicare recipients.

  • Under the status quo, individuals with an income of $85,000 pay 140 percent of the standard premium, and those in the top tax bracket pay 320 percent of the standard premium.
  • The proposed plan would phase-down contributions beginning at $55,000 for individuals.
  • For every $1,000 above the income threshold, the contribution would be decreased 1.8 percent.

Source: Kathryn Nix, "Turning Medicare into True Social Insurance," Heritage Foundation, July 18, 2012.

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