CHICAGO (Reuters) - The most urgent retirement issue facing the new Biden administration and Congress is not Social Security reform or figuring out how to boost savings in 401(k)s and IRA accounts.
Instead, it is a ticking clock in the Medicare program. Our health insurance program for seniors has a solvency problem - not ten or 20 years from now, but in just a few years.
The financial stress impacts just one part of Medicare - Part A, which pays for hospital bills. Unlike other parts of Medicare, Part A is funded mainly through the Medicare payroll tax; parts B and D are financed through a combination of general government revenue and enrollee premiums.
The Medicare trustees projected last year that the Hospital Insurance Trust Fund will become insolvent in 2024 - less than three years from now. Just last week, the Congressional Budget Office (CBO) forecast a somewhat longer insolvency date due to an improving economic outlook - 2026. But we will have to wait and see what the Medicare trustees have to say a bit later this year.
An easy way to understand the problem is by thinking of the trust fund as a checking account balance that receives Medicare’s payroll tax payments, and uses it to pay the bills. Without changes to expected spending or trust fund revenue, the checking account will run dry in 2024, and would have sufficient funds from current tax payments to meet just 90% of its obligations.
Shortfalls are nothing new for Medicare Part A - they generally are the result of rising healthcare costs. But this is only the second time insolvency has been predicted within five years. The financial cliff has drawn closer due to declining payroll tax receipts during the economic downturn. What to do about the problem?
THE BEST OPTION: ADDITIONAL REVENUE
Plenty of options are available. We could add new revenue, raise the share of costs shouldered by enrollees, or cut benefits - or reduce payments to healthcare providers. The Commonwealth Fund - a foundation focused on healthcare policy - recently published a series of blog posts by Medicare experts bit.ly/2ZjCiDO that does a good job of laying out these options and more. (bit.ly/2ZjCiDO).
The solutions that make the most sense to me involve additional revenue. Cutting Medicare benefits just makes no sense, considering the precarious financial health of many retirees: half of Medicare beneficiaries lived on incomes below $29,650 in 2019 and 25% had incomes below $17,000, according to the Kaiser Family Foundation bit.ly/3dk6Cqs. (bit.ly/3dk6Cqs)
Some of the Commonwealth Fund writers advocate further use of private-market competition to solve the problem, but I find these arguments unconvincing. The idea served up most frequently is premium support, a holdover idea from the last decade that would replace Medicare’s system of defined benefits with a defined government contribution - some would call it a voucher - that enrollees would use to buy in to either Original Medicare or privately offered Advantage plans.
Yet evidence shows that the marketplace approach already in place for prescription drug and Medicare Advantage plans does not work well nyti.ms/2OuhJm2 (nyti.ms/2OuhJm2). And in parts of the country where Original Medicare is more expensive than Advantage, this approach would create a lopsided playing field.
Injecting new revenue can be done without adding substantially to the burden of low- and middle-income households. The payroll tax rate that funds Part A (2.9% split evenly by employers and workers) could be lifted very gradually over a ten-year period - for example, a 1 percentage-point hike over ten years.
“It wasn’t recommended by many of our expert contributors,” said Dr. Gretchen Jacobson, vice president for Medicare at Commonwealth. “But the payroll tax is the primary source of income for the trust fund, so any kind of increase does help to build up that base.”
Moreover, the payroll tax rate for Medicare has not been changed since the late 1980s, even as the enrolled population and per-capita spending doubled. (The cap on the amount of wages subject to tax was eliminated in the early 1990s, making the tax more progressive and raising additional revenue.)
A more popular revenue idea suggested by Commonwealth’s experts would direct some or all revenue raised by the net investment income tax (NIIT) on high-income individuals into the Part A trust fund. The NIIT is a 3.8% tax on net investment income bit.ly/37j5PCd, and is paid by single tax-return filers with modified gross income of $200,000 and $250,000 for joint filers (bit.ly/37j5PCd).
Currently, revenue collected through the NIIT goes into the government’s general coffers. That could shift enough revenue over a ten-year period into Part A to eliminate much of the shortfall.
A solvency fix also could present an opportunity to improve benefits. For example, a reform package could add a hard cap on out-of-pocket costs for prescription drugs, or add dental, vision and hearing benefits to Original Medicare. It also could include addition of a long-term care benefit, perhaps the most significant uncovered risk for most retirees.
Writing by Mark Miller; Editing by Matthew Lewis
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