Saturday, September 30, 2017

Overestimating ourselves

Atul Gawande has a piece in The New Yorker about people who are skeptical of Medicaid but support Medicare.

"I know so many folks on Medicaid that just don't work. They're lazy," he quotes one woman. Medicare is different.
“We all pay in for that,” she pointed out, “and we all benefit.” That made all the difference in the world. From the moment we earn an income, we all contribute to Medicare, and, in return, when we reach sixty-five we can all count on it, regardless of our circumstances. There is genuine reciprocity. You don’t know whether you’ll need more health care than you pay for or less. Her husband thus far has needed much less than he’s paid for. Others need more. But we all get the same deal, and, she felt, that’s what makes it O.K.
She's partly right.

Every US citizen qualifies for Medicare when they turn 65, but you pay more for your premiums if you have a shorter history of having paid into the system.

That part about "we all get the same deal" is alluring, but subtly wrong.

It's true that if you and I have both paid into Medicare for 40 quarters or more (the same cutoff as for Social Security) we're both eligible for the lowest-cost premiums on some parts of the program.

But if your income was much higher than mine, you will actually pay a somewhat higher premium for Part B (we pay the same for Part A), while the resulting coverage is the same, so in that regard I get a better deal than you do for being lower income.

But that's very much the smaller piece of how different the deal is for different people.

Medicare taxes are like Social Security taxes in that they only cover "payroll" (i.e., normal wages and salary, not capital gains, stock options, carried interest, etc.).

But they're different in that they're not capped.

Social Security collects 12.4% of all your payroll income, from the first dollar, up to an income of $127,200. (Technically, "you" only pay 6.2%, while your employer pays another 6.2% then you never see, not even on your pay stub where it shows your gross pay along with all the things pulled out for your tax withholding, health insurance premium, and retirement-fund contribution. But 12.4% of your gross salary gets sent to the Social Security Administration to fund that program.)

So if you earn $10,000, that means there's $1,240 being sent on your behalf.

If you earn $100,000, there's $12,400 being sent.

If you're at $127,200, the SSA is receiving $15,772.80 on your behalf.

And if you're earning, $1,000,000, the SSA is still receiving $15,772,80 from you and your employer.

That may seem unfair, but it's arguably not, because there's also a maximum you'll get back, and people with lower incomes during their working lives get smaller benefit checks, but those checks represent a larger percentage of what they used to earn when they were working.

The Social Security system is in this way moderately redistributive, from higher incomes to lower incomes.

The Medicare tax rate is only 2.9% (like Social Security it's split, with half being paid by "you" and half by your employer - but really, all of it is a cost of employing you, so in effect, it's all being paid by you).

But there's no limit on how much of your income is taxable.

If you earn $10,000, you pay $29.

If you earn $100,000, you pay $2,900.

And if you earn $1,000,000, you pay $29,000.

Let's say I go through my whole working career of 45 years struggling by on $20,000 a year. I paid $58 per year, for 45 years, for a total of $2,610.

Meanwhile, you stepped from college right into a million-dollar job and (to keep the calculations simple) never got a raise. You paid $29,000 a year for 45 years, or a total of $1,305,000.

And then when you and I retire, we get the same coverage for the same premium. Well, not quite the same premium - you pay somewhat more than I do for Part B.

But the $2,610 I've paid in over my entire working life would hardly pay a single year's premium for a healthy 30-year-old, in a system that allowed insurance companies to charge sick people more (in other words, what the GOP is trying to create). And premiums for your typical 65-year-old are a lot higher than that. If you're lucky, you live long enough to be on Medicare for 15, 20, 25 years. The "fair" premium for an 85-year-old is a lot of money.

The woman in Gawande's article thinks that "we all get the same deal" under Medicare, but we manifestly don't. The great majority of us are subsidized by households with incomes significantly higher than average, but we don't typically run the numbers to see how that happens.

Don't get me wrong - I am not objecting to these subsidies in the least, either in Social Security or in Medicare. On Social Security I think my income is high enough that I'm slightly subsidizing people with lower incomes. On Medicare I suspect I'm still below the point where I'm paying for myself, so on balance between the two systems I'm roughly neither subsidized nor subsidizing.

But I strongly support the principle.

What determines whether your income is high or low? Some of it is your hard work and your intelligence. But some of it is luck of various kinds. Subsidies of the kind embedded in Social Security and Medicare give people insurance against the "bad luck" component of having low earnings over your lifetime, while not having any measurable effect of dissuading people from trying to earn more.

And just in terms of accounting and where the money is, these programs couldn't exist without the kind of cross-subsidy that they use. So both in terms of fairness and practicality, I have no problem supporting them.

But my impression is that most people don't understand that the subsidies exist. Medicaid is for lazy people who don't bother getting a job, but I paid for my Medicare, I earned it.

No, most likely you didn't pay for more than a fraction of your Medicare. Unless you're a lot wealthier than average, some meaningful chunk of your Medicare was paid for by someone richer than you.

I suspect that a high-income person with even a moderate degree of political engagement is likely to be aware of this subsidy. That would help account for the desire some wealthy people have to cripple the system and reduce their tax load.

If a person with an average income realized how much their Medicare coverage was being subsidized by wealthier households, which way would they go?

Would they rail against the injustice of subsidizing medical insurance for those lazy people who don't earn enough to pay for it themselves?

Or would they be more tolerant of people with incomes lower than themselves getting their Medicaid insurance subsidized by others - including, to a modest extent, by households with average income?

(Medicare premium-cost info from here.)

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