A Different Proposal On Medicare

Posted by Bob Lord

One key factor contributing to the projected Medicare funding shortfall is the longer life expectancies of Americans. The Medicare trustees’ report actually includes assumes that just a few decades from now the life expectancy for a woman turning 65 will be age 89. That means we'll have huge numbers of 90+ year olds roaming around, if the assumptions prove accurate. 

The knee jerk reaction of those on the right (with supposed centrists all too eager to follow along) is to raise the Medicare eligibility age. But, for the fair minded, it’s not that simple, because life expectancies have not increased uniformly for all income brackets. Those at the top truly are living much longer. Those closer to the bottom? Not so much. Indeed, recent data suggests that life expectancies may be declining for those near the bottom of the income scale. It’s not hard to figure out that raising the Medicare eligibility age is unfair because of differing life expectancies. I’ve written about this in a previous post regarding social security, but the same principles apply. Obviously, if one income group has a 15-year life expectancy at age 65 and another income group has a 20-year life expectancy at age 65, the first income group loses a larger portion of its benefits if the eligibility age arbitrarily is increased from age 65 to age 67.

It’s admittedly a tricky problem. We know some people are going to live really long lives and those long lives are breaking the Medicare bank. But we don’t know which people are going to live long lives. So, the logic goes, we should just cut the first two years off everyone’s eligibility.  It sounds like a fair solution, until you learn that there’s a correlation between life expectancy and wealth and income. At that point, the logic breaks down, especially when you consider that the folks with less income and less wealth are the ones whom Medicare was supposed to help in the first place. To be put it more crassly, we didn’t enact Medicare to provide health care for old rich people.

What if, instead of squeezing 65 and 66 year olds, we squeezed those who live the really long lives? You know, the folks who are causing the problem. No, I’m not suggesting we cut off benefits for anyone over 85. But the essence of Medicare is that it is an insurance program. We pay in while we’re young and receive coverage once we reach age 65. As with any insurance program, we don’t know whether it’s a good or a bad investment. If we only make it to age 66, our Medicare taxes prove to be a terrible investment. But if we make it to age 103, we hit a home run.

So, why not recognize that those who live beyond the life expectancy upon which their Medicare taxes were based have recovered their investment and any benefits they receive after reaching that life expectancy are profits, which, like other profits, may be subject to tax? Because Medicare benefits are by definition spent as soon as they are received, the tax would have to be structured carefully in order to avoid financial hardship for those without sufficient means. Admittedly, this would be far more complicated than lopping off the first two years of everyone’s Medicare eligibility, and it's far beyond my capacity to estimate how helpful it would be in eliminating the underfunding. But it has two advantages that offset the added complexity: it’s more rational and it’s fairer.