April 19, 2014

Means-Testing: A Good Idea Whose Time Is Coming

With its proposal to reduce Medicare's Supplementary Medical Insurance (SMI) subsidies to affluent beneficiaries, the Senate Finance Committee is pushing the budget debate in the right direction.

The Concord Coalition has long argued that means-testing is an equitable way to reduce the rising burden of entitlement spending -- not just for Medicare, but for all major federal benefit programs. We have also pointed out that the public's reluctance to think realistically about entitlements could pose obstacles to any such proposal. Most people believe that they have some sort of property claim to their benefits. And while the idea of means-testing is popular, few people understand that it must include the middle class to save real money.

Predictably, the Finance Committee's Medicare proposal has run into both of these stumbling blocks.

 

A Premium Hike is Not a Tax Hike

Although SMI is three-quarters financed by a direct general revenue subsidy, there is nearly as much resistance to reducing SMI benefits as there is to reducing the benefits of programs funded through earmarked payroll contributions. This is especially true when SMI benefit reductions take the form of a premium increase -- that is, a hike in the fee beneficiaries have to pay to receive their heavily subsidized insurance package. To many people, a fee hike looks like a tax hike.

The Senate Finance Committee understood as much. That's why it initially decided on an awkward and unworkable plan to means-test deductibles, which aren't payable to the government. After critics assailed the plan, the Committee changed its mind and has now adopted a new and much fairer plan to means-test premiums.

The Committee's initial attempt to camouflage its benefit cuts points to a larger contradiction in how America views entitlement programs. On the one hand, the public sees its benefits as a form of personal property. On the other, Congress doesn't fund them, doesn't guarantee them, and doesn't formally recognize them as a future taxpayer liability. The public and Congress want it both ways and can draw on either interpretation as convenient.

 

I'm for Sacrifice, So Soak the Rich

Polls show that means-testing enjoys far more public support than any other approach to entitlement reform. This is a testament to the public's good sense in wanting to preserve a floor of protection. Yet it's also true that the public likes to think that means-testing need only affect the rich. The Finance Committee seems to be engaged in the same wishful thinking: Its proposal would affect no more than 10 percent of beneficiary households, and among those affected only a tiny fraction have incomes high enough to pay the maximum premium.

The problem is that no means test can generate significant savings unless it asks the broad middle class to sacrifice too. It's not enough to ask the top 10 percent of beneficiaries to give something up. We need to ask whether the top quarter can. Or even the top half. We can't just say: I'm for sacrifice, so soak the rich. Until most voters are willing to sacrifice a bit themselves, there will be no solution to our entitlement problem.

 

One of the Best Overall Strategies

Again, the Concord Coalition supports the Senate Finance Committee's means-testing proposal. Although in its present form it won't save much money, if passed into law it will familiarize Americans with a concept that rightfully deserves much wider application.

Unfortunately, both ends of the political spectrum are less than enthusiastic about means-testing. The right doesn't like it because it's steeply progressive, the left because it shrinks the welfare state. America had better move beyond this senseless gridlock. To be sure, we need to do much more to restructure health benefits than means-test them. But, as we have often argued, means-testing is one of the best overall strategies by which an aging society can preserve (or even strengthen) its floor of protection while ensuring that the total cost of its senior programs remains sustainable over time.

FACING FACTS AUTHORS: Neil Howe and Richard Jackson CONCORD COALITION EXECUTIVE DIRECTOR: Martha Phillips

The Concord Coalition web pages were designed by Marla Parker and Krista Reymann. These pages are now maintained byCraig Cheslog. Last updated: 25 Jun 1997