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The Payroll Tax Cut Debate: Impacting Both Social Security & Medicare


  Contributors: ... Medicare, ... Social Security

Congress is debating extension of the 2011 payroll tax cut that temporarily reduced the amount contributed to Social Security by workers to 4.2 percent of their earnings. This proposal is being touted as a middle class tax cut that will help spur the economy. The National Committee to Preserve Social Security and Medicare believes that this diversion of funds poses a long-term threat to the Social Security program and does not provide the most effective stimulus. Proposals to cut Medicare benefits to pay for this tax cut mean seniors would bear the burden of this stimulus effort.

Making Work Pay vs. Payroll Tax Cut

Targeting Stimulus Effectively

Historically, low to moderate-income households spend a larger share of any stimulus they receive than those at higher income levels; therefore, the most effective economic stimulus should target this demographic. The Making Work Pay tax credit, which expired on December 31, 2010, provided workers with a federal income tax credit of 6.2 percent of wages, up to a maximum of $400 for individuals and $800 for married couples. It was phased out for workers with incomes above $75,000 and $150,000 for couples, focusing its simulative affects on lower to moderate income Americans.

Text Box: The payroll tax cut provides a worker earning $100,000 ten times the tax cut provided to a worker earning $10,000

The Making Work Pay tax credit is preferable to the payroll tax holiday because it is also available to all workers, not just those covered by Social Security (many state and local government workers do not pay into Social Security) and it is more favorable to workers earning less than $20,000.  The payroll tax holiday would provide a worker earning $100,000 a tax cut that would be ten times greater than the one received by a worker earning $10,000.

Not only is the Making Work Pay tax credit more effective as an economic stimulus than the payroll tax holiday, it also does not break the traditional link between payroll tax contributions and Social Security benefits, which weakens the fundamental earned right nature of the program.

Cutting Medicare to Pay for Payroll Tax Cut Targets Seniors Programs Twice

Several measures to reduce Medicare spending have been identified by policymakers as ways to help pay for an extension of the Social Security payroll tax cut through 2012. The following outlines some of these proposals and the impact they would have on seniors.

Raising the Medicare Eligibility Age from 65 to 67

Approximately 5 million 65- and 66-year olds would no longer qualify for Medicare meaning:

  • 2/3 would pay an average of $2,200 more per year for their health care in 2014 because of the loss of Medicare coverage.Text Box: Raising the Medicare age means more than 3 million seniors ages 65 & 66 would pay about $183 a month or $2,200 a year more for health care
  • Although health insurance would be available in 2014 through the health exchanges, established under the Affordable Care Act (health care reform), private insurers can age rate - charging older participants up to 3 times more for insurance than it would cost younger people.

The costs for seniors currently in Medicare would also increase if younger, healthier retirees (the 65-and 66- year olds) were no longer in the Medicare risk pool.

Higher Costs for Beneficiaries

There have been many different proposals to shift Medicare costs to seniors to save the program money. While their approaches vary, some common provisions include: raising the Medicare Part B deductible for new beneficiaries, establishing a $100 home health co-pay for new enrollees, and applying a Part B premium surcharge for new beneficiaries that purchase near first-dollar Medigap coverage.

Under President Obama's deficit reduction plan the Medicare Part B deductible for new enrollees would increase by $25 every two years in 2017, 2019, and 2021. This is in addition to increased home health copayments and Medigap fees for some Medicare beneficiaries.

More Means-testing for Seniors in Medicare

Medicare is already means-tested with higher -income seniors paying monthly Part B premiums that are double or triple the amount of the standard Part B premium. Means-testing could dismantle Medicare's successful risk pool by making the program increasingly unfair for wealthier beneficiaries - who often tend to be healthier and younger. This would leave more costly beneficiaries in the Medicare program, raising costs for everyone.

Over time, without proper inflation adjustments, these means-testing provisions could also capture more and more middle-income seniors. Among the numerous means-testing proposals currently under consideration, Part B and Part D premiums would rise 15% or high-income seniors could be asked to pay the full cost of their Medicare benefits.

Providing Stimulus that Doesn't Target Seniors' Programs

The National Committee believes providing a middle class tax cut to help spur the economy is the right policy but cutting the contributions that fund Social Security is the wrong strategy. Cutting benefits and shifting costs to seniors in Medicare to pay for this flawed stimulus strategy only compounds the damage. We urge Congress to pass an effective stimulus plan that doesn't target America 's most successful retirement and anti-poverty programs.

 

Government Relations and Policy, January 2012

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