Yuval Levin has an excellent post at The Corner on why raising the eligibility age for Medicare and Social Security is not the ideal way to go. Rather, we should embrace graduated eligibility, i.e., eligibility that varies according to lifetime earnings:
There might be one way to maximize the benefits of increasing the age of eligibility and to use that increase to improve Medicare’s design while minimizing the costs (especially the costs shifted to other public programs) and also the political resistance from the left: A means-tested increase in the retirement age. Simply put, the age would rise most—perhaps to 70 years old, gradually—for wealthier people (as measured by lifetime earnings, which all means testing should be), would rise some (say to 67, gradually) for somewhat less wealthy people, and would remain the same for those with the lowest lifetime earnings.
This idea has had some appeal to a few reform-minded liberals (Ezekiel Emanuel proposed a version of it a few months ago, for instance) and it should appeal to conservative reformers too. It involves the right kind of means testing—giving less to the wealthy rather than taking more from them. It moves in the direction of treating Medicare as the transfer program that it is rather than an earned benefit (and even many of the latest entrants into the program would likely still get more in benefits than they put in during their working years). It leaves wealthier seniors in the more (though still hardly sufficiently) competitive private market where they have more reasons to behave like consumers and therefore exercise a healthier effect on the health-care system. (Even leaving those seniors in an Obamacare exchange, for all of that system’s immense design problems, would put them closer to a competitive system than fee-for-service Medicare.) It encourages wealthier older people to keep working, and to keep paying taxes. It takes account of the fact that the increases in longevity that justify an increase in Medicare’s eligibility age have not been nearly as significant among poorer Americans as among wealthier ones. And while it might save less money than an increase in everyone’s eligibility age, it would actually capture the bulk of the net savings from such an increase because it would capture the portion of the population where most real savings would be achieved: people who would not be covered by other public programs during the additional years preceding Medicare eligibility, would not become uninsured, and would be in a position to bear the cost of additional years of coverage through continuing work arrangements or personal resources. [Emphasis added]
Though Henry Aaron did not make reference to graduated eligibility in his recent essay in Democracy Journal, he helped make the case for it by citing recent research on the unevenness of longevity gains:
For the past couple of decades, these gains have been unequally shared. Research by University of Illinois at Chicago public health professor S. Jay Olshansky and his co-authors documents that most longevity gains have accrued to the well educated. Those with little education are actually dying younger than they were in the past. A pre-existing longevity gap is expanding with alarming speed. Between 1990 and 2008, life expectancy at age 25 among white men and women with less than a high-school education fell 3.3 years and 5.3 years, respectively. Part of the reason for this drop may well be that those with less-than-high-school education rank lower on the socioeconomic scale now than they did even two decades ago, but much of the shift is a mystery. Among white men and women with at least a college education, life expectancy at age 25 rose 4.7 years and 3.3 years, respectively, over that period. In 1990, life expectancy at age 25 for white men with at least a college education was five years more than it was for those with less than a high-school education; by 2008, the gap was 13.1 years. For white women, the gap shot up from 1.9 years to 10.5 years. [Emphasis added]
One potential objection is that graduated eligibility might constitute an implicit tax on investing in human capital, as high lifetime earnings will mean delayed retirement. Andrew Biggs addressed this concern in his National Affairs essay on “Means Testing and Its Limits“:
Incentives to work would still be undermined somewhat under such an approach. Reducing benefits based upon lifetime earnings would mean that, for each additional dollar an individual earns, the return through Social Security would be smaller. Thus, the “net tax rate” under Social Security — that is, the net value of taxes paid and benefits earned — would increase, and obviously higher tax rates discourage work.
But it is likely that these negative effects would be significantly smaller under a lifetime-earnings approach than under a traditional means test. After all, these net tax increases would be relatively small at any given time, since they would be spread out over a full working lifetime rather than concentrated in retirement. This makes an enormous difference, as public-finance economists hold that the negative effects of taxes — known as the “deadweight loss” — rise with the square of the tax rate. The implication is that it is far better to spread a smaller tax increase over a larger number of years than to concentrate a large increase over a shorter period of time. In effect, this approach would take the favorite maxim of tax reformers — broaden the base while lowering the rate — and apply it to reductions in entitlement benefits, yielding, in essence, a lower effective tax over a larger number of years.
Graduated eligibility merits serious consideration, not least because, as Yuval notes, it addresses the most common and powerful objection to raising the eligibility age, namely that it is unfair to low-income workers who tend to have shorter lifespans and who are more likely to engage in physically demanding labor.