The Agenda

Means-Testing and Post-Transfer Inequality

Recently, Aaron Carroll, a health economist, suggested parenthetically that means-testing Medicare “won’t do much for the bottom line.” 

It’s worth observing that there is more than one bottom line. For example, policymakers might be concerned about whether social transfers redistribute primarily to the poor or primarily to the relatively affluent. This is an issue to which the House Budget Committee’s Republican staffers have drawn attention, and rightfully so:

[T]he distribution of government transfers has moved away from households in the lower part of the income scale. For instance, in 1979, households in the lowest income quintile received 54 percent of all transfer payments. In 2007, those households received just 36 percent of transfers.

This shift reflects a growth in programs that focus on the elderly population and are not for the most part income-adjusted, such as Social Security and Medicare. In other words, the structure of some of the nation’s largest entitlement programs has decreased the share of government transfer payments going tolower-income households and directed an increasing share of government spending to wealthier seniors. According to the CBO’s findings, this trend, accelerated by the retirement of the baby-boom generation, contributes to an increase in inequality. [Emphasis added]

Advocates of the expansion of social transfers to the non-poor will presumably see these issues somewhat differently, a subject to which we’ll return. 

Note that means-testing in the context of premium support could make a significant difference when it comes to mitigating inequality, as premium support could vary according to lifetime average income. For example, the federal government could offer enough premium support to pay the second-lowest bid to deliver a defined benefit for the all seniors but those with lifetime average incomes that placed them in, say, the top 15% of the distribution. Those individuals would receive a somewhat reduced amount of premium support. This might not lead to dramatic cost savings, but one suspects that many Americans would consider this a fairer approach.

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