Raise Medicare Taxes

I have made this argument before -- your lifetime Medicare taxes cover only about a third of the benefits you will receive.   Social Security taxes are set about right -- to the extent we come up short on Social Security, it is only because a feckless Congress spent all the excess money in the good years and has none left for the lean years.

But Medicare is seriously mis-priced.  I have always argued that this is dangerous, because there is nothing that screws up the economy more than messed up price signals.  In particular, I have argued that a lot of the glowy hazy love of Medicare by Americans is likely due to the fact that it is seriously mis-priced.  Let's price the thing right, and then we can have a real debate about whether it needs reform or is worth it.

A recent study confirms my fear that the mispricing of Medicare is distorting perceptions of its utility.

As debate over the national debt and the federal budget deficit begins to heat up again, an analysis of national polls conducted in 2013 shows that, compared with recent government reports prepared by experts, the public has different views about the need to reduce future Medicare spending to deal with the federal budget deficit. Many experts believe that future Medicare spending will have to be reduced in order to lower the federal budget deficit [1] but polls show little support (10% to 36%) for major reductions in Medicare spending for this purpose. In fact, many Americans feel so strongly that they say they would vote against candidates who favor such reductions. Many experts see Medicare as a major contributor to the federal budget deficit today, but only about one-third (31%) of the public agrees.

This analysis appears as a Special Report in the September 12, 2013, issue of New England Journal of Medicine.

One reason that many Americans believe Medicare does not contribute to the deficit is that the majority thinks Medicare recipients pay or have prepaid the cost of their health care. Medicare beneficiaries on average pay about $1 for every $3 in benefits they receive. [2] However, about two-thirds of the public believe that most Medicare recipients get benefits worth about the same (27%) or less (41%) than what they have paid in payroll taxes during their working lives and in premiums for their current coverage.

Update:  Kevin Drum writes on the same study.  Oddly, he seems to blame the fact that Americans have been trained to expect something for nothing from the government on Conservatives.  I am happy to throw Conservatives under the bus for a lot of things but I think the Left gets a lot of the blame if Americans have been fooled into thinking expensive government freebies aren't really costing them anything.


  1. Matthew Slyfield:

    "I have made this argument before -- your lifetime Medicare taxes cover only about a third of the benefits you will receive.
    Social Security taxes are set about right -- to the extent we come up
    short on Social Security, it is only because a feckless Congress spent
    all the excess money in the good years and has none left for the lean

    Everything in this quote is wrong. Both Medicare and Social Security are pay as you go programs. Your lifetime Medicare taxes paid for your parents benefits. Your kids' taxes will have to pay for yours.

    Social Security taxes are set about right if the ratio of payers to beneficiaries was 2-4 times what it currently is.

    "Congress spent all the excess money in the good years and has none left for the lean years."

    This at least implies the old meme about Congress raiding the trust fund, which not only untrue, it's both impossible and unnecessary. Every dollar in the SS trust fund was by law invested in US Treasury bonds straight back to the creation of SS in the 1930s. That means there has never been any actual money in the trust fund. All over collection went to the general fund, where all treasury bond sale revenue goes.

    Note: the law doesn't specifically require US Treasury bonds, but it sets requirements that no other investment can actually meet.

  2. mesaeconoguy:

    Medicare is doomed – it cannot survive, primarily because it incentivizes overuse and prevents any price information from flowing to the consumer.

    Government also severely distorts provider prices, so there is massive warping of actual costs.

    Here is a good recent piece about the nonexistent trust funds, and their imploding revenue stream (higher yield bonds coming off the books) –


  3. mesaeconoguy:

    I give all the blame to the left in creating the entitlement society, the most recent (and largest/most dangerous) addition – Obamascare - having been passed entirely by the Democrat Party.

    The right has done nothing to dispel the no cost myth, but the drivers of collectivism and massive Euro-style safety nets has been leftists almost exclusively.

  4. norse:

    This statement assumes that medical costs are "correct", which is unlikely given the highly constrained and regulated state of the market. International cost comparisons suggest that US costs are somewhere between 2x to 10x higher than need be. That said, I'll agree that as a government payout program, Medicare is guaranteed to be not enough to cover future boondoggles and bound to eat up more in the future.

  5. NL7:

    Medicare tax is based on your income, so an actor making twenty million on a picture theoretically owes (ignoring deductions, etc.) 2.9% on the total (unless classified as employee-employer, then there's 1.45% for each) and the Additional Medicare Tax of 0.9% on wages over $200k. So more than $700k for that one job (it's more complicated, of course, but this is rough).

    Correct pricing would involve not coupling premiums to income (unless for some reason actuarial tables demand it). There's no reason to do it, except that it's simply a tax tied to the Medicare fund, and it's easier to tax the wealthy more because they feel the pain less.

    Of course, it's also somewhat like a (reverse) life insurance policy, in that you aren't sure how long you'll live and whether you'll use it at all. Normal health insurance is generally available during the time you are paying premiums, and term life insurance is a hedge in case you die; Medicare (if you pretend it's insurance and not taxing tied to welfare) is a hedge against you living so long you need a moderate amount of old age health insurance. So it's not a direct comparison to the major types of classic insurance people are familiar with. If a private company ran something like Medicare (and they do; long term care insurance has a similar dynamic of you betting that you'll live X years and need Y amount of long term care; the insurance company bets that you'll die early or be reasonably healthy up until death), then they'd consult actuarial tables to figure out life expectancy.

    I really just want Social Security and Medicare to be opt-out (opt-in would be better; I'll settle for opt-out). Charge whatever you want, mismanage it however, just don't make me pay for it and don't bail it out from the Treasury. If old people still think it's a good people when they had to pay for insurance, then good luck. But I don't want the program and it's unreasonable to force me to buy it.

  6. Matthew Slyfield:

    "and their imploding revenue stream (higher yield bonds coming off the books)"

    What revenue stream? Any appearance of a revenue stream is nothing but smoke and mirrors. For SSA to actually spend any of that the treasury would actually have to pay off those bonds with real money.

  7. Matthew Slyfield:

    They can't allow an opt out, at least not one that get's you out of paying the taxes.

    Any suggestion that SS or Medicare are "insurance" programs is a lie. A lie that goes all the way back to the creation of those programs in the first place. By law, they are pay as you go benefit programs where current workers taxes pay for current beneficiaries benefits.

  8. Matthew Slyfield:

    Oh, the trust fund exists, it just never contained anything of any value.

  9. mesaeconoguy:

    They have a theoretical interest payment stream, which just diminished significantly.

    To your earlier point, though, because their holdings are basically limited to government securities, they are cannibalizing revenues.

  10. Roy:

    Utterly mystified as to how Warren that OASDI taxes set about right. Warren, after all, speaks finance. He knows how to set up a spreadsheet. He could, as can nearly anyone with some saavy about, say, Excel, create a spreadsheet into which he could put the amounts the gov't reports to him that it has collected for OASDI for each of the years he paid into that fund. Then he could assume a rate of return (or, even better, look up what actually got paid), plug that in, and find out what his OASDI fund would be had he managed it himself. Then he can look at what OASDI says it will pay him. He can set up a spreadsheet to figure out whether payments at that rate will EVER use up the principle.

    Hint: they won't. Not even for a minimum wage work history, much less one with solid employment for most of one's working years.

    AS Matt has pointed out, from Day One when OASDI started, it was always about wealth transfer, never about insurance. Not only is that OBVIOUS from the fact it paid out from its beginning, meaning it paid those who never bought in. It's clear also from even a casual examination of the payment schedule.

  11. NL7:

    Yes, I know they're pay as you go. But they are presented to the public and understood by lay people as insurance and premiums. If they are the mandatory programs they are presented to be, then I just want an opt out.

    They could allow opt outs, it would just require reducing benefits and/or increasing current collections. Which means they pretty much won't any time soon. Social Security privatization is functionally similar to an opt out, but with the caveat of forced savings. For some reason that option is considered politically plausible, though not likely, even though it would also crimp the revenues.

  12. NL7:

    It has value to SS fund, at the expense of general federal revenue. SS has the right to claim GFR moneys by presenting the bonds. So there's no value to the system overall, but there is value to SS at the expense of any other demands on GFR (unless Congress tragically decided to dishonor its own bonds).

  13. herdgadfly:

    Are you sure that we really need to raise medicare fees? We could administer medicare using a voucher system that pays enrollees rather than providers directly on a pre-determined fee schedule that would permit patients to negotiate payments and keep any savings.


    Or we could privatize Medicare Insurance to accomplish significant savings in administrative costs.

    "In isolation, the net cost of administering Medicare is 11% greater than that of private insurers on a per capita basis. [After] including all non-patient care cost . . . public healthcare administration is 281% greater than that of private insurance administration. This assessment still does not include the cost of collecting taxes, nor does it include the providers’ cost of complying with insurance billing and collection requirements."


  14. Lawrence:

    Fee-for-service Medicare is definitely mispriced because there is no limit on how much service a Medicare eligible person under Part B can demand.
    Then there is the problem of so much "heroic" service being provided to a Medicare eligible person in a hospital (Part A) during the last days of life.

  15. Matthew Slyfield:

    Unfortunately, SS is not getting GFR moneys. The bonds are being redeemed by issuing new bonds as general debt, trading debt for debt.

  16. mesaeconoguy:

    That’s a critical point – Socialist Insecurity is directly contributing to debt held by the public. It is increasing outstanding debt.

    No one understands this.

    I have seen multiple sources (including and especially the Democrat Party) contend that it isn’t.

    They are wrong and/or intentionally lying.

  17. js4strings:

    I think the last sentence hits the nail on the head, when people do not know the cost of what they are paying for, everything is rather painless. However, if you knew that you could shop around doctor services like you do buying a car and could see the real cost, you might think twice about the money you spend or at least try and find the best price. But when it's a big sucking government hole (or people liking the government teet), of which you see nothing out of pocket for the most part, no real reform will ever happen. IMHO

  18. marque2:

    They used to allow opt out of SSA but then some places started taking advantage.of that so the law was changed. I believe if you live human in Galveston Texas you don't pay into SSA.
    Of course State and Federal government workers don't pay on as well.

  19. marque2:

    I call BS on the studies showing costs are 2-10x what they need be.

  20. MingoV:

    The political cost of raising payroll taxes is high. Thus, it rarely happens. Congress tried to increase Medicare funding by raising participant fees and co-payments. But, the senior lobby effectively curtailed increased beneficiary charges. The only other options are to raise the age of eligibility or reduce coverage. Social Security's very gradual phase-in of increasing the eligibility age to 67 was so unpopular that no other attempts were made. Medicare eligibility stayed at 65. Reducing health care coverage for Medicare beneficiaries is considered to be more appalling than raising the age of eligibility, so that has not been done.

    The bottom line is that the US population and its politicians continue to engage in magical thinking in regards to paying for government benefits. They think that succeeding generations will miraculously generate the trillions of dollars needed to hoist the federal government out the the financial hole it dug by offering benefits it could not fund.

  21. mesocyclone:

    Note that the pay as you go programs, if run long enough, are hard to distinguish from "pay for your parents." In other words, pay as you go is not necessarily a bad thing, from a fairness point of view.

    The rub is coming up with the money for the first generation, or if costs continue to rise, the money for later ones.

  22. Matthew Slyfield:

    Actually, the money problem is ultimately a demographics problem.

    When SS was first created there were more than 10 workers for every beneficiary and most beneficiaries only collected for a few years.

    Now, as the baby boomers prepare for retirement there are only around 2 workers for every beneficiary and the beneficiaries can expect to be collecting for 2 to 4 decades.

    A pay as you go retirement system is sustainable only as long as the demographics work. For such a program to have long term sustainability there must be many more workers than beneficiaries.

  23. Jerry:

    I'm almost 66 years old and just spent two days in the hospital for a collapsed lung. The hospital charged Medicare (Part A) about $21,000. Medicare actually paid about $26,000! Say what?? My lifetime contribution (Medicare tax) I figure was less than $20,000 ($1,000,000 plus lifetime earnings * 1.45%). Yep, it is way underfunded! And mismanaged!

  24. Joe_Da:

    "This at least implies the old meme about Congress raiding the trust fund, which not only untrue, it's both impossible and unnecessary. Every dollar in the SS trust fund was by law invested in US Treasury bonds straight back to the creation of SS in the 1930s. That means there has never been any actual money in the trust fund. All over collection went to the general fund, where all treasury bond sale revenue goes.

    Note: the law doesn't specifically require US Treasury bonds, but it sets requirements that no other investment can actually meet."

    The economic reality is the "the trust fund" is void of any real assets. The sole source of those interagency Treasury bonds is from the future revenues from taxpayers.

  25. epobirs:

    Look into the term 'medical tourism' and why it is increasingly popular. The price distortion at work in the US and several other markets for medical services is quite apparent.

  26. Matthew Slyfield:

    True, the trust fund is void of any real asset, but my point is that it has been that way by design from the very beginning.

  27. marque2:

    Yeah, show me the procedure that is 10x less.

    I know of a handful of cases where you can get the procedure for about 60% but that is mostly because of the lack of regulation which can be good or bad. We saw what Kermit did in his unregulated medical industry.

    And while getting In Vitro in Czech or Israel seems like a good deal, I am certainly not going to India for my heart operation. There are other reasons why they charge less in India than just US over regulation/cost hiding. (You know they don't have blood banks in India for instance. Don't have a complication on the table. )

  28. Joe_Da:

    Then I misunderstood your comment. Quite a few defenders/believers of the long term solvency of the SS system believe the trust fund has real value in those Treasury bills which are in reality money spend by the general fund which the sole source of repayment is from the taxpayers.

  29. mesaeconoguy:

    That is precisely why Ponzi investment schemes are illegal.

  30. Matthew Slyfield:

    "Quite a few defenders/believers of the long term solvency of the SS
    system believe the trust fund has real value in those Treasury bills"

    Here's the problem with SSA investing in T-Bills: A T-Bill bought by a private investor does have real value, but the T-Bills that SSA buys for the trust fund have two issues that negate their value.

    1. The T-bills bought by SSA are non-negotiable. That means they can't be sold on the secondary market and the only way SSA can get money for them is to redeem them with the Treasury dept.

    2. T-bills are bonds. A bond in general is a fixed interest loan. SSA buying T-Bills is the government loaning money to itself.
    Let's say you have $100. You decide to loan yourself $100 at 5% interest. Do you come out ahead in the long run? Of course not. T-Bills in the SS trust fund aren't an investment, they are money flushed down the toilet.

    So why did the government build up such a large trust fund in the first place? They saw what was going to happen when the baby boomers retired. By law SS can only pay benefits equal to current revenue plus the balance of the trust fund. The current use of the trust fund is nothing but smoke and mirrors to allow them to continue to pay out over promised benefits out of general debt.

  31. Matthew Slyfield:

    But it isn't illegal when the government does it.


  32. Rick Caird:

    Now, wait, Jerry. Your contribution was 1.45% x 2. Second, your contribution should be considered to have been inflation adjusted and invested to get a fair comparison. I looked at the report and it did allow for inflation + 2% to adjust the contribution. While I agree Medicare is underfunded, if you go back to the original cost projections, it was projected to cost substantially less than it is now costing.

  33. norse:

    Just as an example - i had my appendix removed a few years ago. Appendectomies are one of the most standard medical procedures. Mine cost 36k USD. The max for this procedure is around 3k in Germany, just to compare to a 1st world nation.

  34. marque2:

    Not sure you can compare that way, since in socialized systems many of the costs are hidden, and the rate charged for cases with complications is also not included, also I am guessing this is the surgery cost and not the secondary cost of recovery in the hospital, etc . There are many places where you could get the appendectomy in the USA for the same price if you shopped around. Not that your appendectomy was a bit high. There was a study that showed that the average cost of an appendectomy in the USA was 33K total cost (including recovery), it was done in support of Obama care (and is easily searchable online) - note though, that they didn't account for complications, so the lady who got an appendectomy as part of a more extensive cancer treatment whose costs were 180K are included in the figure.

    But the point is make sure you are comparing all the costs that go into the US and German figures. Got to be sure we are comparing apples to apples, and getting all the costs right.

    If the difference is really that much, then next time, for you gall bladder, cut a deal with the insurance company. Tell them if they pay to fly you to Germany and hotel costs you will get the surgery there, and it will save them money. You would get a free vacation out of it. Insurance companies are willing to cut deals like that for getting operations in Costa Rica.

  35. marque2:

    I should also point out, in Germany you don't have as many rights. Dr gets it wrong for instance, you can't sue the hospital and Doctor, and everyone in sight for 10 million dollars. You are just a casualty of the system.

    Also in Germany there is a wait. An example, my grandfather had to wait a year there for a new pacemaker. In the US a new pacemaker would take a few weeks. And Germany is considered good!

  36. norse:

    Not sure if spending substantially on insuring against medical malpractice instead of focussing on actually practicing medical care is a great economic advantage. The cost for the appendectomy in Germany includes full recovery; note that these are the costs charged by the hospital (health care is socialized through insurance, not through providers in Germany).

    Let me turn this argument around: what would it take to convince you that US healthcare costs are 2x-10x higher than they could be?

  37. marque2:

    Found an article about the Galveston system. It is only for Galveston county workers and three surrounding county workers. The results are impressive, workers get 2 - 3x the return for the Galveston investment than the would investing the same in SSA


  38. LarryGross:

    you have to get the facts straight first. Medicare Part A (Hospitalization) is what you FICA pays for - and by law it cannot pay out more than what FICA generates unless Congress makes changes. That's the law.

    Medicare PartB (C,D) are totally VOLUNTARY that no one pre-pays one dime towards.

    the "entitlement" part of it is that if you are 65 you are ENTITLED to BUY IT - NOT get it free.

    and even after you BUY IT - it covers ONLY 80% of your costs.

    you have to cover the other 20% and that's where things get interesting.

    but we're already into territory that apparently Warren is not truly aware of.

    so repeat after me: Medicare Part B (which pays providers) is NOT pre-paid with your FICA taxes.

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