RE: A Tax By Another Name

by Yuval Levin

Andrew, many thanks for the characteristically thoughtful and generous post. A couple of brief points in response.


First, in writing that the starting principle of means testing the entitlements should be “give less to the wealthy rather than take more from them” I meant only to say that the means testing itself (in the case of Medicare, as noted) should take the form of reduced benefits rather than of higher premiums. Almost all proposals for means testing Medicare (from both parties) involve imposing even higher premiums on the wealthy. This is largely because Medicare is a defined-benefit system which makes it difficult to alter the benefit for differently situated people. This would be much easier if Medicare were (as it should be for many other reasons) a premium-support system, and indeed the Ryan premium-support proposal does envision a means-tested benefit. In today’s Medicare system, though, means testing usually amounts to higher premiums, which basically just turns Medicare into an inefficiency machine—taking more money from certain people and then giving it back to them in the form of a poorly designed benefit. Adjusting the age of eligibility is one of the few ways you can modulate the benefit itself in today’s Medicare, which is why I proposed doing so on a sliding scale on the basis of lifetime earnings.


Second, the message sent by such reforms is to my mind a key part of the appeal of greater means testing. Of the (few) politically plausible entitlement compromises at this point, it is the one that best qualifies as an incremental step in the direction of the sort of reformed entitlement system that conservatives envision, because it begins to move away from the myth of universal earned benefits and address the entitlement programs as what they really: massive transfer programs that serve an important purpose but need to serve it more effectively and at a lower cost. Medicare and Social Security have of course always been massive transfer programs moving money from the young to the old. They are not savings programs, and their “trust funds” do not actually put money aside to be spent on benefits. As older Americans have grown wealthier over the years, moreover, Social Security and Medicare have also become particularly perverse transfer programs because they now generally move money from a less wealthy cohort of people (younger workers) to a more wealthy one (retired people). In fact, because workers with lower incomes generally only pay the payroll tax and not the income tax, the only federal taxes that these workers pay go to fund benefits for people who are on the whole wealthier than they are. That’s perverse social policy and it’s also of course unsustainable fiscal policy. The more we come to see these programs as part of the safety net, rather than imagining they are earned universal benefits, the better equipped we will be to think rationally about how to reform them.


I don’t see this kind of change of mindset as, to borrow your phrase, “just one more punch thrown at the successful.” Not getting welfare is not a punishment, and it is not a tax. And the sorts of adjustments I proposed in the piece you cited (a gradual means-tested increase of the Medicare age and means testing the annual cost-of-living increase in Social Security) would still leave the people affected with a very large benefit from these programs—it would just be a little less large than it otherwise would have been, to help the federal government better balance its finances and to advance the cause of a broader transformation of the entitlement state. Remember, both Social Security and Medicare already are modestly means tested today (with higher premiums for the wealthy in Medicare and a progressive benefit formula and progressive taxation of benefits in Social Security), and in ways that have not proven politically disastrous along the lines you suggest. I’m arguing for a different approach to such means testing—one that takes account of the need to reduce spending rather than just the need to fund spending and that applies based on lifetime earnings rather than on income in retirement so as to minimize perverse incentives against saving and working.


I think raising the Medicare eligibility age in a means tested way rather than (as you suggested) universally would also help avoid shifting costs to other government programs and so would yield more significant net savings in a way that’s better suited to advancing a broader reform. And I certainly think it’s better than giving the government more power to “negotiate” (i.e. dictate) drug and medical-equipment prices—but that’s probably a subject for another time.


I’m a believer in a strong but limited and clearly defined safety net to help protect our most vulnerable citizens from the risks of modern life, and I think old-age protections are an important part of such a safety net. But I’m not a believer in a comprehensive entitlement state built on the premise that universal entitlement can build solidarity. I think that notion—which lies at the heart of the social-democratic idea—is morally confused, and we are also increasingly learning that it is fiscally unsustainable. There’s not much we can do to reform our welfare state from the latter to the former model under current political circumstances, but there’s a little we can do and I think means testing stands out on that short list of plausible steps.

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