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Raising Medicare’s Eligibility Age Gives the Most Bang for the Buck



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Patrick Brennan has been doing a great job of documenting the latest twists and turns in the fiscal-cliff negotiations. I do want to quibble with one thing he wrote yesterday, in which he said raising the Medicare eligibility age was “an odd top priority” for Republicans:

The Kaiser Family Foundation predicts that net federal spending would be reduced by $5.7 billion in 2014, a basically paltry number — that said, the savings do grow significantly in the out years. There are plenty of good reasons to raise the Medicare eligibility age . . . and I’m inclined to think it would be worth doing, but it is an odd top priority for Republicans seeking spending cuts to balance out the tax increases to which they’re gradually acquiescing.

There are a couple of things to keep in mind here. The first is that spending on Medicare is growing at a faster rate than the economy, and a faster rate than tax revenues are growing. That’s why health-care spending is eating an ever-larger share of the budget.

The second is that the retirement age isn’t raised all at once, but rather in gradual increments, for example by two months a year beginning in 2014, such that the retirement age reaches 67 in 2027. So the savings in raising the retirement age are also captured in out-years rather than in the near term.

So while savings might be relatively small in 2014, they are huge in later years. In January, the CBO estimated that gradually raising the retirement age from 65 to 67 would save Congress $148 billion from 2012 to 2021, but it would save even more in future decades. For example, between 2022 and 2031, if Medicare spending continued to grow at historical rates, we would save an additional $1 trillion.

This is, indeed, the game that Republicans should have been playing all along, the game that Democrats have been schooling them at for a century: making small changes to entitlements today that pay big dividends in future decades.#more#

In addition, raising the retirement age would give 65- and 66-year-olds more incentive to keep working, which leads to more tax revenue to fund our ever-growing entitlement state.

Yuval Levin rightly points out that raising the retirement age isn’t a full-fledged restructuring of the Medicare program. To me, that’s part of its appeal: It’s a gradual restructuring of government health spending on younger retirees, something that is more politically viable than full-fledged restructuring.

Yuval also makes the point that it would be better to means-test Medicare on lifetime earnings rather than on annual income, as raising the retirement age would do (because Obamacare’s exchanges would then cover younger retirees, and those exchanges are means-tested based on annual income). He’s right about that — for a thorough treatment read Andrew Biggs’s piece on means-testing reform in National Affairs — but I’m not sure that there’s time at this stage in the fiscal-cliff negotiations to introduce such a complex reform into the Medicare program. 

Hence, as we reflect on our current situation — which is the fiscal cliff — I continue to argue that raising Medicare’s retirement age gives us the best bang for the buck.



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