Sunday, April 7, 2013

One Reason Why Medicare Can’t Be Cut

Obama said something correct, and useful, to a group of Republican Senators.

The problem is, the public believes something completely different. The Republicans want Obama to make that case to the public that it needs to change its worldview.

… The president was referring to the widespread and incorrect view, especially among older Americans, that Medicare recipients get only what they have paid for through taxes, premiums and medical co-payments.

That’ right. Older Americans think they’re entitled to the Medicare and Social Security benefits they’ve received because they’re completely paid for. In short, they believe these are like payments out of their own savings.*

I think that’s a general point, although the Obama administration was quick to point out that he was only talking about the portion of Medicare that covers doctors’ bills and outpatient services.

Here’s an example of the general belief:

“Social Security and Medicare are both earned and paid for through our salary taxes,” a reader of The New York Times wrote recently. “A better term for these two programs is ‘earned benefits.’ It more accurately describes them without giving them a sense of negativity and welfare.”

Nothing could be further from the truth. Here’s a chart for a hypothetical rich couple (earning $116K/yr)

13-04-04, Benefits to Taxes for Entitlements, Rich Couples

The correct interpretation of this is that someone retiring right now at age 65 (Dr. Roberts, for example) would be above 2013. That is, he’s paid more into Social Security than he’ll get back, but that will be swamped by the excess of Medicare benefits he’ll receive. That same follows for me: I’m 48, and so you’d look at 2029 for me.

It’s actually worse for lower income couples (income of $64K/yr in the example):

13-04-04, Benefits to Taxes for Entitlements, Poor Couples

Note that, to get the scale on the left to show up, I have to reshow the first chart on this second one.

Here’s the problem is worse, in part because Social Security and Medicare payments are calculated differently.

Social Security payments are somewhat proportional to what you pay in. So, a poorer couple pays in less, but also gets out less at retirement. However, since there is a floor on social security payments, it’s more likely there will be a shortfall for what a poorer couple pays in.

But Medicare is totally different. Everyone is entitled to the same benefits under Medicare: so the dark brown curve is in the same position on both graphs. But, a poorer couple pays in much less, so the net benefit to them is much larger.

Read the whole thing, entitled “Misperceptions of Benefits Make Trimming Harder” in the April 4 issue of The New York Times.

* It’s actually worse than that because there are 4 parts to Medicare, and the FICA tax that’s withdrawn from everyone’s paycheck only includes Medicare Part A (hospitalization costs).

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