FYI Memo for Senator McConnell: Medicare Is Already Means-Tested

Speaking of the “fiscal cliff,” a November 11 Wall Street Journal interview of the Senate minority leader asked, “What kind of a deal would Mr. [Mitch] McConnell accept? The senator’s top priority is long-term entitlement reform. ‘Changing the eligibility for entitlements is the only thing that can possibly fix the country long term.’ He wants means-testing for programs like Medicare. ‘Warren Buffett’s always complaining about not paying enough in taxes,’ he says. ‘What really irritates me is I’m paying for his Medicare.’”

In reality, means-testing entitlements would be a nonsensical “top priority” in fiscal cliff negotiations because (1) the fiscal cliff is not about fixing long-term problems but about preventing rather than postponing an imminent $536 billion tax hike, and because (2) the U.S. already imposes means-testing for both Social Security and Medicare.

With Social Security, the ratio of benefits to “contributions” is lowest for those who paid the most payroll taxes for the most years and highest for those who paid the least.  Making matters much worse, up to 85 percent of benefits are now taxable for seniors who either saved for retirement or keep working, but tax-exempt for others.  That highly-progressive 1993 tax on benefits is another devious way of means-testing after-tax retirement benefits.

Thanks to new redistributionist rules from the Obama administration, monthly Medicare premiums now rise from $99.90 on single seniors with less than $85,000 in income to $229.70 (including drug coverage) at incomes from $107,000 to $160,000, and to $386.10 above $214,000.   Since President Clinton removed any ceiling on income subject to Medicare payroll tax, those who had relatively high salaries while working paid many thousands more in Medicare taxes than they can ever expect to receive in benefits – assuming they are foolish enough to sign up (as I did not) for benefits that also cost nearly four times as much as others pay.

The most money that Medicare might save by denying benefits to the “top 1 percent” would be roughly 1 percent.  That would leave 99 percent of Medicare spending untouched.  If high-income people were denied benefits, however, they would also be relieved of the steeply-progressive new Medicare premiums.  Medicare would then lose all that revenue they are now expecting to collect by charging much higher premiums at higher incomes.    The net effect of eliminating both benefits and premiums of high-income seniors offers no solution to the nation’s long-term fiscal problems.  It is certainly no solution to the very-near-term threat of a series of massive tax increases on January 1.