FACING FACTS The Truth about Entitlements and the Budget A Fax Alert from The Concord Coalition FAX ALERT ( Number 11, November 14, 1995) A BUDGET TRAIN WRECK -- ALL OVER $4.80 A MONTH IN MEDICARE PREMIUMS The administration claims that its refusal to agree to Congress's proposed hike in Medicare premiums marks a "defining difference" between GOP and White House policy. Not so. The dispute is about politics and timing -- not policy. The truth is that both sides agree Medicare premiums must eventually be raised. What's more, both sides would raise them by similar amounts. Where's the Difference? Let's start with some facts. This year, the beneficiary premium for Medicare Supplementary Medical Insurance (SMI) is $46.10 a month. Congress would raise it to $53.50 in 1996, and then continue to raise it until it reaches $87.60 in 2002. (These and subsequent numbers refer to the House plan; the Senate plan differs only slightly.) Under current law, the premium would drop to $43.70 in 1996, then climb to $60.50 in 2002. Although, under the President's budget plan, the premium would also drop in 1996 -- his re-election year -- it would rise very sharply beginning in 1999. In fact, by 2002 it would be $82.80 a month, only $4.80 less than in the GOP plan. Looked at another way, the annual premium in the GOP plan would be $498 higher in 2002 than in 1995; under the administration plan, it would be $440 higher. That's a "defining difference"? The rationale for higher premiums is simple -- and compelling. Without the hikes, the share of SMI paid for by beneficiaries will drop -- and the share paid for by general revenues will rise. This year, SMI premiums will cover 31.5 percent of the cost of elderly enrollees. Under current law, premiums would cover 25 percent of these costs from 1996 to 1998; thereafter, premiums would rise at the same rate as Social Security checks -- i.e., with the CPI. Because per-beneficiary SMI costs are projected to grow much faster than inflation, the beneficiary-financed share of SMI would fall precipitously -- to about 20 percent by 2002. Both sides agree this is bad policy. The difference is that Congress would keep premiums at 31.5 percent of elderly SMI costs. The White House would hold the line at 25 percent. The administration argues that the 31.5 percent share is an accident. True enough. When today's $46.10 premium level was legislated back in 1990, the intent was that it cover just 25 percent of SMI costs. What the administration neglects to say is that the 25 percent share was itself arbitrary -- and has nothing to do with Medicare's design. Throughout Medicare's first ten years, SMI premiums were required to cover 50 percent of costs. Critics who say the GOP is breaking a deal with seniors forget what the original deal was. What about the Taxpayer? And what about the other participant in the deal: the taxpayer? The general revenue subsidy per SMI beneficiary will total $1,305 in FY 1995. Under current law, that subsidy will grow by $1,762 from FY 1995 to FY 2002 -- ten times more than the growth in the per-beneficiary premium ($182). Congress would hold down the increase by raising premiums (and by slowing the growth in SMI costs). Still, even under the GOP's "draconian" plan, the yearly per-beneficiary SMI subsidy would climb by $1,181 over the next seven years -- two-and-a-half times more than premiums. SMI Premiums versus General Revenue Subsidy Baseline House FY 1995 FY2002 FY2002 Yearly Premium per Beneficiary $538 $720 $1,025 Change: 1995-2002 $182 $487 Yearly Subsidy per Beneficiary $1,305 $3,067 $2,486 Change: 1995-2002 $1,762 $1,181 Monthly Premium $46.10 $60.50 $87.60 Note: Table figures are for fiscal years, except for monthly premiums, which refer to calendar years. Source: CBO and authors' calculations. When Congress and the administration finally sit down to work out a compromise, they would do well to focus on these numbers. After all, it's not the tooth fairy who pays for Medicare. Each dollar of premium revenue foregone is an extra dollar added to someone else's taxes -- or, via deficits, to our children's taxes.
FACING FACTS AUTHORS: Neil Howe and Richard Jackson CONCORD COALITION EXECUTIVE DIRECTOR: Martha Phillips