The idea of raising Medicare’s retirement age by two years has been surprisingly prominent in recent weeks—it appears to be one of the Republicans’ key proposals in the fiscal-cliff talks, and liberal policy wonks have launched a huge opposition effort.
I would vote in favor of raising the age, but I would not make it a central tenet of a Medicare-reform agenda. I don’t think it’s as important as some have been suggesting, or that it would be worth a whole lot in negotiations. Raising the age would meet one of the criteria for a worthwhile reform: it would save money. CBO estimates that it would save about $125 billion over ten years, most of it in the out years. In no single year in the coming decade would it save more than about $35 billion on net—an amount equal to about three days of federal spending. That’s not nothing, and every little bit counts. But that’s almost all you get from an increase in the Medicare eligibility age. And a portion of those costs (even beyond what CBO tries to estimate) would of course be shifted to other government programs—particularly in the case of 65 and 66 year olds who were eligible for Medicaid or for Obamacare’s state-exchange subsidies in states where those existed after 2014. Conservatives often (and rightly) complain about cost shifting created by federal programs in other contexts and should not ignore it here: Medicare is not an island apart from the larger federal budget. An increase in the age, moreover, would not be quite a structural reform of the program. It would delay entry into an otherwise unreformed Medicare system that disfigures our larger health-care system. It might encourage some seniors to work longer, which would yield some benefits, but it would not meaningfully improve the design of Medicare, and it’s not clear to me how it would enable other more meaningful reforms to follow.
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 more constructive 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.
I don’t think anyone has modeled the fiscal effects of such an idea, but I wouldn’t be surprised if this kind of reform (especially if it raised the eligibility age of the wealthiest seniors to 70 or so) achieved net savings very close to those derived from raising everyone’s eligibility age to 67. There would certainly be real political resistance to such a reform, but there are strong (if different) reasons for both Republicans and Democrats to prefer it to an increase in everyone’s retirement age. It would be a modest but genuine structural reform of Medicare, pointed in the right direction.