Even Higher Income-Related Premiums are Bad for Beneficiaries, and Bad for Medicare

The Medicare program requires higher-income individuals to contribute more toward the cost of the program than the general population. When enrolled in Medicare, people with incomes of $85,000 (or $170,000 for couples) pay higher premiums for Medicare Part B (doctors’, other health care professionals’, and outpatient services) and Part D (prescription drugs) coverage, including if they have a Medicare Advantage plan. Over time, the proportion of people with Medicare who pay higher premiums for Medicare Part B and Part D has grown significantly.

Unfortunately, Congress is once again asking Medicare beneficiaries to pay even more, as a way to offset congressional spending on non-Medicare programs. Raising premiums on higher-income seniors, often referred to as “income-related premiums”, is bad policy. Shifting more costs onto this group of older Americans ignores how much they’ve already contributed to Medicare throughout their working lives, as well as how much they continue to contribute to Medicare through additional taxes. Furthermore, this change could drive these beneficiaries – who help contribute to the overall health of Medicare – out of the Medicare program. Congress already raised income-related premiums in 2015, and that increase will be taking effect in 2018. Asking Medicare beneficiaries to pay for non-Medicare benefit changes again will make it even harder to finance improvements and address long-term challenges in the Medicare program.

The Medicare program is already heavily income related. Currently, approximately 7 percent of beneficiaries are subject to the higher-income premiums for Part B, and approximately 6 percent of beneficiaries are subject to the higher income premiums for Part D. The higher income premium rises with income, with the highest premium – over 3 times the premium for the typical retiree – beginning at $160,000 (single) and $320,000 (couple) in 2018. While a typical senior will pay over $2,000 annually in premiums for Part B and D coverage, a high-income senior can be expected to pay over 3 times that amount – more than $6,400 annually. The income-related premium, in essence, is a premium tax on higher income seniors.

Second, higher income beneficiaries have already paid more into the system in the form of higher payroll taxes – unlike Social Security, all wage income is subject to the Medicare payroll tax without a cap. A 1.45% payroll tax is levied on both employers and employees; thus, 2.9% of total wages goes to Medicare. A typical worker earning $50,000 contributes (both employer and employee share) about $1,450 a year (2.9%). A person earning $85,000 – the threshold for income-related premiums – contributes $2,465 per year. While someone at $214,000 – the top threshold for income related premiums – contributes $6,206. In addition, for those earning wages above $200,000 (single) and $250,000 (couple), an additional 0.9% tax applies on amounts above those thresholds that goes to Medicare.

Given higher payroll taxes and current income-related premiums, we should not further single out higher income beneficiaries for higher premium payments. Shifting more and more costs onto higher-income beneficiaries could cause them to leave the Medicare program. If the beneficiaries in the highest income groups are asked to pay an even greater share of their Medicare premium, they could decide not to enroll in Medicare and seek alternative sources of insurance. This would worsen the Medicare risk pool, leaving more costly beneficiaries in the Medicare program, raising costs for everyone else.

Third, higher income seniors also pay higher taxes on their Social Security benefits for Medicare. For seniors with incomes above $34,000 (single) and $44,000 (couple), an additional 35% of Social Security benefits are subject to the income tax, with the revenue dedicated to Medicare. A typical Social Security benefit of $16,320 – with 35% of it taxed at the 28% rate – would pay another $1,600 per year into Medicare.

Finally, income-relating in the Medicare program hurts new Medicare enrollees. When determining who is subject to the income-related premium, the Medicare program relies on the beneficiary’s tax return from the prior year (which reports income made from the year before) – which means income data are at least 2 years old. Thus, new retirees (whose income may have dropped precipitously from their working years) are subject to higher income-related premiums based on their previous wages, not their current financial situation.

Additional income-relating of premiums is the wrong solution for addressing Medicare’s long-term financial challenges, and asking Medicare beneficiaries to fund non-Medicare changes will only make it more difficult to address Medicare’s own financial issues. Any contribution from Medicare beneficiaries should be used to strengthen and improve the Medicare program.