Two Years That Make a Big Difference

One of the biggest issues that the House and Senate will have to resolve in the current budget negotiations is whether to raise the age at which Americans are eligible for Medicare. The House chose to keep the age of eligibility at 65, and seems determined to stick to that position. The Senate’s plan, on the other hand, calls for raising the age to 67. This proposal creates more problems than it solves.

The Senate proposal parallels a scheduled increase in the eligibility age for Social Security benefits. Under this reform, enacted in 1983, the “normal retirement age” for Social Security will rise two months a year starting in 2003, until it reaches 66 in 2008. This schedule will be repeated in 2020. By 2025, the normal retirement age will be 67.

At first glance, the Senate’s proposal to keep Medicare’s age of eligibility tied to Social Security’s normal retirement age appears logical and equitable, reflecting demographic reality and future fiscal constraints.

Since the Medicare program’s inception in 1966, the average American life expectancy has increased by 2.8 years, and it is projected to increase an additional 1.1 years by 2025. Today, people in their 60’s are in better health and have fewer disabilities. Presumably, they can work a few more years, especially since most jobs are not as physically demanding as they were in the mid 1960s.

Considering these advancements, and the fiscal pressure that the baby boom generation will soon place on Government retirement plans, it seems reasonable to make people wait a bit longer before they can qualify for Medicare.

But proposals that appear logical at first glance often turn out to be full of problems upon closer examination. Such is the case with the Senate’s plan, which has four basic flaws.

It would be unfair to lower skilled, lower-paid workers. Many skilled, higher-paid and unionized workers have employer-subsidized retiree health insurance. Therefore, they can retire before they qualify for Medicare without the fear that they will either become uninsured or have to pay for expensive individual coverage. These workers – who make up about 44 percent of those close to retirement age – will be largely unaffected by the Senate’s proposal, as long as their employers do not cut back their coverage. (More on that later.) But other workers, those who tend to be less skilled, lower-paid and in more physically demanding jobs, will bear the brunt of the change.

It would increase the number of uninsured senior citizens. Today many workers retire before age 65, with reduced Social Security benefits, and before they are eligible for Medicare. Some retire by choice; others retire because of health problems or because of corporate downsizing.

Many of these retirees do not have health insurance and do not qualify for Medicaid. Indeed, almost half a million Social Security beneficiaries who are between 62 and 64 years old are uninsured. If the age for Medicare eligibility is raised to 67, many 65 and 66-year-olds will retire without health coverage, and the ranks of the uninsured will grow significantly.

It would lead employers to cut back their health coverage for retired workers. If the Senate proposal is accepted, employers will be faced with the prospect of having to foot the entire health-insurance bill for their 65 and 66-year-old retirees. Many employers might decide that this benefit is just too expensive – and drop all insurance for their retired employees.

This would also affect those retirees older than 66 who receive Medicare. They would lose supplemental insurance, which many employers provide to cover expenses that Medicare does not.

It would pass costs to state governments. If the Senate proposal is enacted, Medicare, which is fully financed by the Federal Government, will simply funnel some of its responsibilities to Medicaid programs, which are partially financed by the states.

For instance, uninsured 65 and 66-year-olds with moderate incomes would be forced to rely on Medicaid when faced with catastrophic medical expenses. In addition, Medicaid would have to pick up the full medical costs – doctor visits, hospital charges, medical tests – incurred by 65 and 66-year-old recipients of Supplemental Security Income. Currently, Medicare pays part of this bill.

The Senate exhibited considerable political courage by addressing Medicare’s uncertain future. Its proposal, unfortunately, is fraught with problems. Fortunately, there is an alternative, one that follows the example of Social Security even more closely.

When Congress decided in 1983 to gradually increase Social Security’s normal retirement age, it did not change the age at which workers could receive early or reduced benefits. Workers can still retire at 62, but the value of their Social Security benefit falls. For instance, people retiring today at 62 receive 80 percent of the benefit they would have received if they had retired at 65. When the normal retirement age is 67, 62-year-old retirees will receive only 70 percent of their benefits.

This approach could be applied to Medicare. Those who chose to sign up for benefits at age 65 or 66 could be required to pay a supplemental, early-retiree premium for the rest of their lives. Today, a monthly charge of roughly $50 would be needed to fully compensate Medicare for the added costs of early coverage.

A more modest and practical proposal would call for partial compensation. Presumably, programs that now help low-income senior citizens pay their Medicare premiums, deductibles and co-insurance could also pick up the premiums for a poor senior citizen forced to retire early.

This simple plan could help avoid the negative consequences of the Senate proposal. And it keeps with the spirit of its plan – to make Medicare look more like Social Security.