Senate Democrats have proposed a modest increase in Medicare Trust Fund revenues. It is a small step in the right direction but leaves huge problems unresolved.
The proposal would extend the 3.8% Medicare payroll tax paid by those making $400,000 or more to a currently exempt class of earnings from partnerships, sole proprietorships and similar income.
It would raise a little more than $200 billion and keep the Medicare Part A (hospital) Trust Fund solvent through 2031, an extension of only three years. The Congressional Budget Office projects the total deficit for Social Security and Medicare will reach $14.1 trillion by 2032. The Democrats’ proposal, details of which still have not been published, would cover a little more than 1% of that red ink.
For years, Congress’ approach to the safety net for the nation’s elderly has been a patchwork strategy of mostly marginal changes in tax rates and age eligibility.
The Senate Democrats’ proposal falls into this category: The patch would be good for only three years, then it’s back to the tailor again. Senate Republicans would be politically inept to oppose this reasonable step to improve the nation’s tattered safety net, but they should go the Democrats one better and propose major changes that would help preserve both Social Security and Medicare over the long run.
The Social Security Trust Fund has savings that in the opinion of the trustees of Social Security and Medicare will allow it to meet its obligations for only 12 more years. If the trust fund’s revenues are not increased, or its benefits curtailed, thereafter it will be able to fulfill earned benefits at only 77 cents on the dollar.
Medicare’s outlook is grimmer. The Hospital Trust Fund covers only hospital expenses. Medicare Parts B and D are funded through premiums and transfers from general revenues. Together, these programs are looking at a deficit of $10.1 trillion over the next decade. For the sixth year in a row, the program’s trustees issued a warning required by law whenever the tax and premium revenues of the whole Medicare program fall below 55% of expected expenses. They say this will be the situation for the next 75 years. That means most of the next 75 years of Medicare deficits will add to federal debt.
Revenue increases must be a part of the solution, and the sooner the better.
Congress could change the definition of income subject to the trust fund tax. Payroll is the most limited kind of income recognized by the Internal Revenue Code. The Senate Democratic proposal adds the category of “pass through” income such as income earned by partners in a law firm or medical practice. An even larger definition includes so-called passive income from rents, interest income, royalties and dividends.
Applying current tax rates to a larger income base would be one way to reduce those huge deficits and bring the federal budget under control. The current safety net system benefits all Americans, and all should support it, whatever their sources of income.
A big change would lift the cap on payroll income subject to the 12.4% Social Security tax (of which employers and employees each pay half). The cap currently leads to a maximum tax of $18,288. For a professional athlete or corporate executive earning $10 million, that represents a tax of less than two-tenths of 1%. At the same time, a single parent earning $40,000 is subject to the full 12.4% tax. That is unjust and should be fixed. And the CBO projects that step alone would bring in $1 billion a year, enough in a decade to nearly wipe out the deficits of the safety net.
There has to be something in that menu to improve on the Senate Democrats’ Medicare patch. If they don’t order it, Republicans should propose it.