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As Policymakers Consider Restructuring Medicare, Even With Economic Gains, Many Seniors "At Risk" Under Some Reform Options

For Immediate Release:
May 20, 1999
Contact: Jill Braunstein



WASHINGTON, DC – Although the economic status of the elderly has improved markedly since the 1960s, many elderly Americans remain dependent on Social Security and Medicare and have little capacity to absorb large increases in health care costs, according to one of three analyses released today by the nonpartisan National Academy of Social Insurance, as part of its ongoing work on restructuring Medicare.

While the elderly today are in better financial shape than previous generations and are less likely than the average American to be poor, many live just on the edge of poverty. "Social Security, pensions, income from assets, and earnings income help many older people remain above the poverty line, but the proportion of Americans aged 65 or older who have incomes less than 150 percent of poverty is higher than for the population as a whole," said Robert Clark of North Carolina State University, who authored the report The Economic Status of the Elderly with Joseph Quinn of Boston College.

And among some subgroups, the likelihood of living near poverty is particularly high. Close to one third of unmarried elderly women are officially "poor" or "near poor," with incomes less than $9,491 in 1996. The report comes at a time when lawmakers are facing tough decisions about ways to keep Medicare solvent, such as increasing Medicare premiums for high-income beneficiaries, or changing Medicare into a system of individual accounts to pay for post-retirement health insurance – the subjects of two other Academy reports issued today.

According to Clark and Quinn, incomes and assets for some future beneficiaries will be inadequate to meet their normal needs and will fall far short of handling expenses associated with catastrophic illness or long-term care. Many older Americans now enjoy financial security, fueled in part by Social Security, employee retirement benefits, and dramatic rises in home equity. But the poorest 40 percent had incomes of less than $13,000 in 1996, with Social Security providing more than 80 percent of their cash income, according to the report. Even those in the "upper middle income group," with incomes between $20,000 and $33,800 per year, received nearly half their income from Social Security, the study found.

Whether the next generations of beneficiaries will be able to pay more for Medicare is the subject of much debate. The issues are reviewed in another study released today, Should Higher Income Beneficiaries Pay More for Medicare?, by Jill Bernstein of the Academy. Higher-income beneficiaries are more likely to have employer-sponsored supplemental insurance, on average, live longer and use more Medicare services, according to Bernstein. But they also already have paid more for Medicare in higher payroll taxes when they were working, and still pay more in income taxes, including taxes on Social Security benefits that are earmarked to fund Medicare.

"If policymakers want higher income beneficiaries to pay more for Medicare, the way they define 'higher income' will be critically important," said Robert Reischauer, chair of the Academy's Medicare Steering Committee. "Relating Medicare payments to income could be administratively cumbersome. Lawmakers and the electorate need to consider political and social costs as well as the possible revenue gains."

Polls show that most Americans who support having higher-income beneficiaries pay more think these policies should affect people with incomes over $40,0000 or $50,000 a year – and many respondents say the amount should be much higher. Because relatively few beneficiaries have incomes that high, the potential for revenues is limited. A proposal discussed by the National Bipartisan Commission on the Future of Medicare this past winter would have charged higher premiums for individuals with incomes over $24,000 for individuals, or $30,000 for couples, with maximum additional payments for individuals with incomes over $40,000, or $50,000 for couples. This would increase Medicare revenues by an estimated 2.7 percent over five years, according to actuaries at the Health Care Financing Administration.

A third report, Individualizing Medicare, authored for the Academy by Deborah Chollet of Alpha Center, reviews current proposals to replace Medicare with individual retirement accounts, funds that could be invested until workers retired and then used to pay for heath insurance.

Important aspects of these proposals have yet to be worked out, Chollet said, including how to guarantee a baseline level of saving for health insurance, how retirees might finance unanticipated health insurance price increases after retirement, and the potential implications for Medicaid of inadequate individual saving. Policymakers would also need to consider whether the administrative costs of managing individual accounts would offset possible rate of return advantages from allowing workers to invest their Medicare contributions in stocks and bonds.

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The National Academy of Social Insurance is a nonprofit, nonpartisan organization of the nation's experts on social insurance. It conducts research and enhances public understanding of social insurance, develops new leaders, and provides a forum for exchanging ideas on issues regarding social insurance. Financial support for the Medicare reports was provided by the Robert Wood Johnson Foundation.
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