Fixing Medicare

Feb 8, 2013 by

Medicare’s problem is structural in nature. The program is funded by a combination of taxes on people in the workforce and user fees. People contribute 2.9% of their incomes towards Medicare. Employers and employees each pay a 1.45% tax on wages, which combine to form a 2.9% contribution. Thus, Medicare’s revenues grow as national wages and labor force participation grow. Medicare’s costs grow as more people age into becoming eligible for benefits and as the value of the benefits increases.

Unfortunately, Medicare is facing both sagging revenues and growing costs. As the Baby Boomers exit the workforce, the proportion of the population earning an income will continue to decline. The Great Recession has caused stagnation in salaries which has also adversely impacted Medicare’s revenue. The retirement of Baby Boomers is a double-whammy, in that it increases Medicare’s costs in addition to decreasing its revenue.

There are really only three levers that can be pulled to reduce Medicare’s insolvency: increase revenue by increasing the rate of taxation, reduce costs by reducing the number of people eligible for Medicare, or reduce costs by reducing the richness of the benefits that Medicare offers. Expanding the number of beneficiaries would not solve the fundamental question of how to financially support the healthcare of America’s aging population. If employed people were added to Medicare and charged premiums intended to subsidize the elderly, they would in essence be paying higher taxes to reduce Medicare’s insolvency. While it would reframe the problem somewhat, the same three levers would remain.

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