Tuesday, September 16, 2014
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Hmm, and why do we need Medicare 'means testing'?

Harvard economist N. Gregory Mankiw raised a stir this weekend, but perhaps for the wrong reason.

Hmm, and why do we need Medicare 'means testing'?

Harvard economist N. Gregory Mankiw raised a stir this weekend with his New York Times "Economic View" column, but perhaps for the wrong reason.

Suggesting that Democrats and Republicans have "stumbled into consensus" in key areas of health-care policy, Mankiw argues prominently that - aha! - the Paul Ryan Medicare-privatization plan is just like President Obama's Affordable Care Act, because both would have those who need insurance obtain it via the private market, on regulated exchanges:

Democratic critics of the [Ryan] plan suggest that enacting it would be akin to pushing Grandma over a cliff. But they rarely point out that the premium-support model is in some ways similar to the system set up under President Obama’s health care law. If choosing among competing private plans on a government-regulated exchange is a good idea for someone at age 50, why is it so horrific for someone who is 70?

It's a misleading argument in several ways, as has already been noted by bloggers such as Mark Kleiman and Steve Benen.   One involves the size of the Ryan plan's premium support (a.k.a. vouchers), which would grow increasingly inadequate as time goes on and thus eliminate the promise of Medicare as a guaranteed health-insurance plan for the elderly.  Another is the starting point: Seniors today have that guaranteed, single-payer plan, and Ryan's plan would eliminate it for those under 55 in favor of a second-best solution much like the one in the ACA, which Democrats modeled on Massachusetts' "Romneycare" plan.  And a third flaw lies in the age and conditions of the shoppers, who may be sharp enough at 60 or 70 to comparison shop for the best possible plans but inevitably face the risk of mental decline. If there's one slam-dunk argument against the Ryan plan, that's it: It's crazy to demand that aging and infirm seniors become comparison shoppers - as if the health-care market works that efficiently and transparently for anybody.

But there was another element of Mankiw's piece that deserves more attention than it's gotten: His good - and widely overlooked - point about the odd juxtaposition of Republican demands for "no tax increases" with their periodic call for "means testing" Medicare:

Democrats want to increase taxes on the rich to fund the looming fiscal gap, which is driven largely by soaring health costs. Republicans object, saying higher taxes create economic distortions, discourage work and impede growth. Last month, John A. Boehner, the House speaker, said that we should instead consider means-testing Medicare. But what does that mean?

Here is how means-testing might work. We could start by choosing some income threshold — say, $250,000 — and then require people over 65 with higher annual income to pay more in Medicare premiums than they do now. For example, for every $1,000 of income beyond the threshold, they might have to pay an extra $10 in annual premiums.

Sounds good, right? But notice that the economic effects of means-testing are much the same as a tax increase. This particular plan is like increasing the income tax rate by one percentage point for high-income seniors. It is only semantics as to whether the $10 is called a “tax” or a “premium.”

Indeed, means-testing could create more economic distortions than would broad-based tax increases. Seniors have more flexibility in how much they work than do typical Americans. In particular, for many people, the timing of retirement is discretionary. The higher marginal tax rates implicit in means-testing will induce people to leave the labor force earlier than they otherwise would. This would deprive the economy of some of its most experienced and productive workers.

There really is no reason to oppose higher taxes for the wealthy at the same time you're calling for means-testing programs like Medicare and Social Security - unless your real goal is to undermine the widespread support those programs have enjoyed for decades precisely because they're available to everybody, and protect us all as we age.

So thanks to Mankiw for pointing it out, even if it should have been obvious all along.

Jeff Gelles Inquirer Business Columnist
About this blog

Jeff Gelles, who writes the Inquirer's weekly Consumer 14.0 and Tech Life columns, takes a broad look at the marketplace of goods, services, and ideas.

Reach Jeff at jgelles@phillynews.com.

Jeff Gelles Inquirer Business Columnist
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