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Means-testing for Medicare
I've several times advocated the means-testing as a way out of our current and forthcoming fiscal problems. Greg Mankiw (see also knzn) offers the classic criticism:
...from the standpoint of incentives, means-testing is equivalent to a tax increase. As a result, economists worried about the adverse incentive effects of taxes (like me) should be also worried about the adverse incentive effects of means-testing.
The point, of course, is well-taken. But something must be taxed, and Medicare benefits for the well-off are a logical candidate. They represent the spending of relatively wealthy people, rather than savings. In behavioral terms, I suspect the negative incentive effects of means-testing are relatively weak. A person might say "If I get too rich, I'll get less Medicare when I am old," and work less. Dollar-for-dollar I expect this effect is weaker than "They'll take out another few percent this year from my paycheck, maybe I'll work less."
I'll stick with means-testing as the least bad way of raising (implicit) marginal tax rates. Means-testing also gets people away from the seductive but dangerous idea that government should take care of everyone, all the time.
Posted by Tyler Cowen on October 21, 2006 at 08:10 AM in Economics, Medicine | Permalink
Comments
I agree with means testing. I don't remember the figures but with Social Security at least, the investment, the dollars paid in over a lifetime of work, are paid back with interest in just a few short years.
But my comment is on the fear of dis-incentivizing high income workers. In the 1960s when I was growing up the highest marginal tax rate was 90-some percent. Still my father and his friends, WWII vets all, talked about paying all their taxes and then more. They believed in building community by working hard and throwing some of their good fortune into the community pot. They most certainly were not disincentivized. The reason lies in the counting of status. People work hard not for dollars, but rather status. In our current time the two have become synonomous - sadly so. In the 1960s status was assigned more on the amount of cooperative community building one contributed. Wealth amassed in such a status system was negative, not positive. It signaled that you weren't contributing. Paul Derringer, the great Cincinnati Reds pitcher lived in my neighborhood growing up. While he was admired for his wealth and style, there was a lessening of his status because he kept his wealth and his contributions to himself - up on the hill there where he lived.
The reason for the change in counting status from community contribution to individual wealth had to do first with the cohesiveness of the WWII generation. They all pulled together through their formative years, thier early 20s, to accomplish a goal together. They became aware of the great power of community. The conservative ideology of the Reagan years stressed the individual and so the counting of status moved that way.
Posted by: Ed D. at Oct 21, 2006 8:33:59 AM
The looming crises in both Medicare and Social security will have to be addressed in a number of ways. Taxing benefits is a no brainer, but more will have to be done. Especially since it will have to come to a crises before the politicians do anything about it.
Probably raising the age of eligibility combined with taxing benefits, and some higher payroll taxes and last but not least, an adjustment to the COLA since its out of whack. And don't be surprised if they adjust it so much in the other direction that they can then just inflate away some of the debt.
ED D. Your views of the WW2 generation, while they may be true are beside the point. We fragmented as a society a long time ago. Even the threat of terroristic attacks on our soil has not done anything to bring us together, in fact we are further apart than ever before.
Yes, its sad, but its reality, we have to make the best of it and deal with it.
Posted by: kyle8 at Oct 21, 2006 9:14:13 AM
A person might say "If I get too rich, I'll get less Medicare when I am old," and work less. Dollar-for-dollar I expect this effect is weaker than "They'll take out another few percent this year from my paycheck, maybe I'll work less."
No, Prof. Cowen, here's what people will say: "If get too rich, I'll get less Medicard when I get old, so I'll save less."
Most people don't have much choice about how much they work: they work however much their employer requires them to. The only way for most people to work less is to retire early.
It's very easy to save less, however.
Posted by: The Other Brock at Oct 21, 2006 9:51:38 AM
Other things a person might say:
- "Medicare is only for the poor people. It's a socialist policy, so I will no longer support it politically."
- "The government is always trying to figure out how rich I am so that they can tax me more, so I must try harder to hide my assets."
- "The american people seem to want to tax me more and more. Is there someplace else I can go? Some country that is willing to let me stay while charging me less to stay?"
- "It is immoral for the majority to vote to take money away from the rich minority, therefore I, being a rich person, must be equally immoral to oppose the immoral majority."
Posted by: irchans at Oct 21, 2006 10:14:52 AM
"Means-testing also gets people away from the seductive but dangerous idea that government should take care of everyone, all the time."
I'd like to recommend then that universities means test their health coverage. After all, the moral hazard of paternalism is the same whether it is government or an employer providing the health coverage. Perhaps the universities should discontinue health care benefits for the professors, who make much more than the grad students and janitors. This would be a useful experiment, don't you think?
Posted by: Mike Huben at Oct 21, 2006 12:14:10 PM
I think that when one view's "Social Capitalist" Europe and their high tax rates on personal income, there is a substitution effect going on. They are taking more of their compensation in the form of leisure. This holds true for retirement ages, hours worked per week, and weeks worked per year. None of this is good for government retirement systems dependent on transfer payments from those who are working.
I think Medicare and Social Security ought to be viewed differently. I don't think most people have honestly thought that the pittance they have historically paid in Medicare/Medicaid taxes is actually going to fund their own Medicare "benefits" when they retire. In my mind anyway it is implicit that if the program remains more or less intact it will have to be funded out of general tax revenue. In other words, it is not viewed as a flawed savings plan the way that Social Security is. It is mostly viewed as a transfer program. I could be wrong about that, but subconsiously I think people don't really think they are funding their own retirement healthcare via their own "contributions".
Social Security on the other hand, if it is to be quasi-fixed by means testing will indeed have moral hazard effects in my opinion. If we must keep the general structure of Social Security intact (i.e. intergenerational transfer payments) I highly favor increasing retirement age instead, noting that when Social security was set up that 65 was basically thought of as a drop dead age where bodies were decrepit and unable to work. With the exception of the truly disabled, this is no longer true. Everyone I know who is 65 years old is in good health from a mobility stand point and from a mental standpoint and they can still work.
Therefore I think the least damaging path would be to gradually increase the retirment age for Social Security, with absolutely no means testing, while with Medicare it ought to be revamped into Medicaid for the poor elderly instead of something for the middle class.
Posted by: happyjuggler0 at Oct 21, 2006 1:04:28 PM
"Means-testing also gets people away from the seductive but dangerous idea that government should take care of everyone, all the time."
More likely, it gets them away from the idea that Medicare is a good idea, because its mostly for "those people."
Posted by: dan at Oct 21, 2006 1:05:21 PM
"People work hard not for dollars, but rather status. In our current time the two have become synonomous - sadly so."
Hmm. Nope, I don't buy it. Just take a look around the Internet-- people work hard for things like status in who's the best World of Warcraft player. Consider the open source/free software hackers. Consider people who work hard to become Scrabble champs.
I can think of all sorts of ways of counting status in non-material ways that didn't exist at all in the 1950s and 1960s. I have a tremendously hard time believing that status is more inextricably linked to money than before.
If anything, the greater freedom and concentration on the individual that Ed D. seems to decry leads to more, not fewer, ways to develop status. And that means that not all of them need to be associated with money-- if you can find a niche community, or even a way to get status that satisfies yourself but no one else, you can be happy. A world where everyone in the community measures status the same way is one where money and status are more likely to be linked, since everyone thinks the same way and thus the money will follow the status.
Of course, there are some ways wherein status is more linked to directly earning money than before. For women, for example, due to the tremendous increase in women working full-time. Does Ed think that that is also one of those terrible effects of women concentrating on the "individual" instead of the community?
Posted by: John Thacker at Oct 21, 2006 1:26:56 PM
Using means-testing as a way out of our current and forthcoming fiscal problems turns it into walfare program. We have increasing medical cost as percentage fo GDP and a falling wage share as percentage of GDP producing an increasing share of the population that depend medicad for their medical care. If we add most people over 65 we will have nearly half of our population dependent on welfare for their medical coverage. I think we need to look at it as more that a fiscal problem.
Posted by: joan at Oct 21, 2006 1:48:17 PM
If you are going to have welfare, then yes it is better to not give it to people who don't actually need it.
You are right that when one program is means tested it probably doesn't affect behaviour very much. But if you take the concept to its logical conclusion and means test every program as Australia has done, it can have a dramatic effect on behaviour. The combined effect of multiple means tested programs can be very high effective marginal rates. As people move back in to work, or continue to work part time instead of retiring fully, the lost benefits far outweigh the additional income.
Posted by: Dan Hill at Oct 21, 2006 2:01:58 PM
Means testing is wrong. It punishes savers and the successful. Social Security programs were declared to be supplements to savings and pensions when this all started. This is the worst kind of bait and switch.
Youy really stepped in it this time, Big Guy.
Posted by: Max at Oct 21, 2006 2:45:51 PM
"Big Guy"??
anyhoo, I would think that for a person who thinks the government is bad at things in general, means testing is problematic. It adds to overhead, it adds bureaucracy, it is unfair to some (how do you fairly count means? Is my 75k/annum in NYC the same as your 75k in Alabama...etc). The easiest, fairest way for everything (medical care, education, roads) is to give them to everyone for free and then separately figure how to raise money to pay for them.
Posted by: RobbL at Oct 21, 2006 4:18:09 PM
I'm against means testing, too, on libertarian grounds. Less progressive social welfare programs are less distortionary from an economic perspective.
Let's have all the government people want, but let's finance it on a benefits-pays principle, so there is no redistribution. That way, we achieve all of our public goods, with none of that nasty government-based theft that libertarians so rightly deride. If a government program disproprotionately benefits the poor, finance it with regressive taxes. If a government program disproportionately benefits the rich, finance it with progressive taxes.
Posted by: Keith at Oct 21, 2006 7:40:30 PM
"They most certainly were not disincentivized. The reason lies in the counting of status. People work hard not for dollars, but rather status. In our current time the two have become synonomous - sadly so."
Not so -- Will Wilkinson is excellent in rebutting this fallacy:
http://www.willwilkinson.net/flybottle/2006/10/18/the-status-of-the-politics-of-status/
Posted by: Slocum at Oct 21, 2006 7:43:51 PM
'll stick with means-testing as the least bad way of raising (implicit) marginal tax rates.
No. Please don't advocate instituting yet another tax. If you think that taxes need to be raised, then advocate raising rates on existing taxes rather than instituting new ones. Means testing is a burden on the individuals involved, who have to report their income and assets in yet another way (probably with a different definition of income than that used by the IRS, if FAFSA is any guide). It requires another set of bureaucrats to administer it, who will do something like the existing IRS staff, but not quite.
Nor can its side effects be predicted. They arise from the practical difficulties of implementation, as with college financial aid means testing. What will be the period over which income will be assessed to determine means? What happens to people whose means have changed radically since then? Assume I have a heart attack, am treated and the government determines I have the means to pay for the treatment. Does the government reimburse the hospital anyway and then come after me? Or does the government refuse to pay the hospital? If the latter and I don't, can't, pay, how does the hospital make itself whole? It still has to cover its expenses.
The income tax is a pattern. Stealth taxes are an anti-pattern.
Posted by: jim at Oct 21, 2006 9:43:41 PM
This link provided by Slocum to the excellent Will Wilkinson's column really ought to be read by anyone stuck in the status is zero sum fallacy. I read it a couple of days ago also and decided to save it to link to for future such status threads.
Posted by: happyjuggler0 at Oct 22, 2006 12:50:46 PM
"They'll take out another few percent this year from my paycheck, maybe I'll work less."
Does anyone besides an economist constructing a hypo ever actually think this?
No, and that tells us something about economics.
Posted by: Anderson at Oct 22, 2006 3:05:33 PM
What Anderson said. And leave Social Security alone. Means-testing would introduce a huge bureaucracy and the program will lose voter support. See a little financial flow-chart movie at:
http://www.youtube.com/watch?v=Tts2uTWt6e8
Posted by: Lee A. Arnold at Oct 22, 2006 3:24:15 PM
"They'll take out another few percent this year from my paycheck, maybe I'll work less."
Does anyone besides an economist constructing a hypo ever actually think this?
Well, actually it is empirically true. Social Capitalist (i.e. high tax, high spend) Europe has high income tax rates and also extremely high consumption taxes (VAT). The cost of working for money is thus quite high, so they substitute leisure instead. Early retirement, shorter work weeks, and more vacation time are all commonplace in high tax countries in Europe.
Posted by: happyjuggler0 at Oct 22, 2006 3:43:53 PM
In our family, we're hoping to be healthy and wealthy enough to just pay our own bills after 65. There is enough disincentive even to use Medicare, including the fact that plenty of sought-after local practitioners won't take on more Medicare patients, and that care from independent nurse-practitioners, our choice of provider, isn't covered. So Medicare turns out to be catastrophic-only-coverage in our planning.
I wouldn't be surprised if there are more like us.
Posted by: who, me? at Oct 22, 2006 6:44:04 PM
Means-testing would introduce a huge bureaucracy and the program will lose voter support.
So we have to disguise the welfare portion of SS with huge transfers from the middle class to itself (and also from the working poor to the retired wealthy), to fool people into thinking they're getting something for nothing so they'll support it? No thanks. Will Wilkinson shreds the "noble lie" argument here.
The overhead required for means testing may be a concern. If it would be too expensive I'd be happy with just paying all SS recipients the same amount, rather than giving Warren Buffett a bigger government check than a retired factory worker.
Posted by: Brian at Oct 23, 2006 12:51:52 PM
"Most people don't have much choice about how much they work: they work however much their employer requires them to. The only way for most people to work less is to retire early."
Nonsense!
I just got a promotion. I got it because I worked hard and did a good job, much more so than was expected of me. With a big disincentive looming, like a 100% marginal tax rate, I would not have done so.
How hard you work is not the only variable under your control. What career path you choose, whether initially or mid-life is under your control, and your decision is influenced by incentives such as these. And even within a career, one often has a choice of workplace. I turned down a cushy, secure state job to work in the private sector because there's more opportunity here. If enough government disincentives had been present I would have gone the other way.
Posted by: Noah Yetter at Oct 23, 2006 3:12:00 PM
There is another approach. Get medicare out of the business of providing or regulating services in kind. Medicare should become a "medibank" or "medi-insure" and only provide cash compensation to customers. The cash payments from medibank should count as income for tax purposes. This would provide a "means test" by other means.
It may be possible to constrain costs by adopting a "no claim bonus" system comparable to auto-insurance so as to reduce trivial and high admin overhead small claims.
It may even be worth considering a fixed table of payments per insured condition, as distinct from straight cost recovery compensation. The difference would encourage customers to shop around for low cost suppliers and thus pocket the difference. This would help maintain some competitive cost-restraint pressure on medical service providers.
Posted by: Tim at Oct 25, 2006 2:25:26 AM
I'll gladly accept no Medicare or SS benefits at retirement if I can stop 'contributing' to them now.
Posted by: David Andersen at Oct 26, 2006 7:14:15 PM
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