Progressives and the Safety Net

Henry J. Aaron for Democracy Journal: Progressives and the Safety Net:


 Gradually raising the fraction of earnings subject to tax from the current 84 percent of earnings to the historical target of 90 percent of earnings, boosting the payroll-tax rate from 6.2 to 7 percent, and taxing currently exempt cash compensation would fully close Social Security’s projected long-term financing gap.

Fixes for both problems are straightforward. Protection against costs of very extended illnesses could be added to the standard Medicare benefit package and paid for with a small increase in premiums for upper-income enrollees, so that the burden on taxpayers is unchanged. Those Medicare enrollees who want to avoid facing deductibles and cost sharing could be offered a “super-Medicare” option that reduces or eliminates deductibles or cost sharing, priced to prevent any increase in the net cost of Medicare to taxpayers. Premiums could be set a bit below those of current Medigap coverage because of savings from eliminating one layer of administration.

Medicare’s defenders take pride in its low administrative costs. The truth is that Medicare spends too little on administration. The program could lower overall spending somewhat if it spent a bit more in certain areas. Each dollar spent on policing fraud would yield several dollars in savings. More program managers could do a better job of making sure that when new procedures are approved as safe and effective, Medicare pays only for approved cases, not for others where safety and efficacy are unproven. Tighter administration is not the financial magic bullet, but if ever the old saying “a billion here, a billion there; pretty soon you’re talking about real money” had bite, it would be here.

Third, some Medicare beneficiaries can afford higher premiums than they now pay. Individuals with incomes below $85,000 and couples with incomes below $170,000 currently pay no more than 25 percent of the cost of Medicare Parts B and D, which cover doctors, drugs, and medical devices. People with incomes above those thresholds pay premiums that cover 35 percent to 80 percent of the actuarial value of coverage. It is simply not credible to argue that couples with incomes of $100,000 to $170,000 cannot afford to pay more than one-fourth of the cost of Supplemental Medical Insurance.