Medicare’s funding future: income v. payroll taxes

The 2012 Medicare Trustees report is out (h/t @sarahkliff), and one graph jumped out at me: the historical and projected financing components of Medicare (payroll taxes, income taxes, premiums, and the much smaller items of taxes on benefits for higher income persons and state contributions for Part D).

Historically, payroll taxes have been the primary funding mechanism, but the further in the future we go, income taxes become increasingly important (general revenue transfers) for financing Medicare. As the report says on p. 25

The Trustees expect growth in SMI Part B and Part D premiums and general fund transfers to continue to outpace GDP growth and HI payroll tax growth in the future. This phenomenon occurs primarily because, under current law, SMI revenue increases at the same rate as expenditures, whereas HI revenue does not. Accordingly, as the HI sources of revenue become increasingly inadequate to cover HI costs, SMI revenues would represent a growing share of total Medicare revenues.

There are obviously many moving parts to such a projection, and there is great policy uncertainty about what we might do in the future. With that proviso I note two points:

  • Shifting more Medicare financing burden to income taxes is an increase in the use of a more progressive form of taxation (income taxes given current system) to fund Medicare
  • Payroll taxes and history of beneficiaries having paid payroll taxes have been a key part of the popularity of Medicare, and reinforced the (incorrect) notion that beneficiaries had pre-funded their Medicare costs (it is a pay as you go system). If income taxes are used to pay a larger portion of Medicare in the future, it may help to end the perception that beneficiaries already paid for the cost of their care. This post shows that payroll taxes by beneficiaries do not cover the cost of their care; they weren’t designed to do so, but the perception lingers to powerful effect that makes addressing the cost side of the program very hard

About Don Taylor
Professor of Public Policy at Duke University (with appointments in Business, Nursing, Community and Family Medicine, and the Duke Clinical Research Institute). I am one of the founding faculty of the Margolis Center for Health Policy, and currently serve as Chair of Duke's University Priorities Committee (UPC). My research focuses on improving care for persons who are dying, and I am co-PI of a CMMI award in Community Based Palliative Care. I teach both undergrads and grad students at Duke. On twitter @donaldhtaylorjr

3 Responses to Medicare’s funding future: income v. payroll taxes

  1. Pingback: Social Security disability, rewind « freeforall

  2. Pingback: Social Security and the mingling of DI and OASI « The Reality-Based Community

  3. Pingback: April 21st blogging the last 4 years | freeforall

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