Health Law Daily CBO analyzes distribution of lifetime Medicare taxes and spending
Thursday, August 10, 2017

CBO analyzes distribution of lifetime Medicare taxes and spending

By Jeffrey H. Brochin, J.D.

A Congressional Budget Office (CBO) report has examined the relationship between lifetime household earnings and net lifetime spending and has concluded that using lifetime household earnings as a measure of permanent income, net lifetime Medicare spending as a share of lifetime earnings is lower for beneficiaries with higher lifetime household earnings. The study complements previous studies on the distribution of Medicare by taking advantage of a unique data set that links a measure of lifetime earnings with Medicare spending. Also, the study improved on earlier studies by estimating the relationship between permanent income and spending by using more recent cohorts of beneficiaries and accounting for projected changes in population demographics when projecting the distribution of Medicare for current and future beneficiaries (CBO Report, August 2017).

Background. In the coming decades, federal spending for Medicare—the largest federal health care program—is expected to grow faster than the economy. In fiscal year 2016, the Medicare program spent almost $600 billion on benefits for about 57 million people who are at least 65 years old, are disabled, or have end-stage kidney disease. Medicare spending will increase from about 4 percent of gross domestic product (GDP) in 2016 to almost 7 percent in 2046. That mounting fiscal pressure has prompted policymakers to consider measures to slow the program’s growth. How such measures affect beneficiaries in different socioeconomic groups depends on the distribution of taxes paid to and benefits received from the current Medicare system by each group. However, the few studies that have estimated that distribution offer conflicting views. This latest study incorporates new estimates of the distribution of Medicare spending across beneficiaries with different lifetime household earnings for beneficiaries age 65 or older who were born in the 1950s.

New data set utilized. For any socioeconomic group, the consequences of changing Medicare depend on the distribution of taxes paid to and benefits received from the system in place. However, the few studies that have estimated that distribution have provided conflicting views. In order to estimate the distribution of Medicare taxes and spending, the latest study used rich data set statistics with information on beneficiaries’ lifetime earnings and annual Medicare spending. In contrast with earlier studies, this new data set included more recent cohorts (statistical subjects) of beneficiaries. The study projected the distribution of Medicare taxes and spending on the basis of administrative earnings data as well as demographic and economic projections from the CBO’s long-term micro-simulation model.

Focus on men born in the 1950s. This study’s main analysis focused on men born in the 1950s. For beneficiaries with higher lifetime household earnings, both lifetime Medicare taxes and lifetime spending—understood to be net of premiums unless stated otherwise in the study—were found to be greater. Lifetime spending net of taxes, however, was about the same across quintiles except for being much lower for people in the highest quintile of lifetime household earnings. Those estimates as well as information on earnings suggests that lifetime Medicare spending net of taxes makes up a smaller share of lifetime individual earnings for beneficiaries with higher lifetime household earnings. The pattern also held true for women born in the 1950s. For groups of younger cohorts, between the lowest and highest quintiles of lifetime household earnings, the research anticipated the difference in net lifetime spending as a share of lifetime earnings to be larger.

Different SES measure. The distribution of Medicare—or how lifetime Medicare spending net of lifetime contributions to Medicare varies across beneficiaries of different socioeconomic status (SES)—is unclear. Contributions to the Medicare system come mainly from Medicare taxes, Medicare premiums, and other sources—mostly transfers from the general fund. The newest analysis, however, did not consider transfers from the general fund and other financing sources, which together financed about 45 percent of Medicare spending in 2015; rather this study used lifetime household earnings as the measure of SES. The study noted that taxes increase almost proportionally with earnings, and that people with higher earnings pay higher premiums. However, whether beneficiaries with higher lifetime household earnings also have higher lifetime spending was unclear. For example, beneficiaries with higher lifetime household earnings might have lower lifetime spending because of better health status, resulting in lower annual spending. Alternatively, they might have higher lifetime spending because of higher annual spending associated with greater demand for health care services or longer life expectancy.

Payment in and distribution out. Under the existing system, people working today contribute to a significant portion of the benefits that current beneficiaries receive. With Medicare growing faster than the economy, the mismatch between what each cohort pays into and receives from the system will grow. Projected net lifetime Medicare spending across cohorts also will change. If either economic growth or spending growth affects different SES groups differently, the distribution of Medicare across cohorts would change.

Using the CBO’s long-term budget model (CBOLT), the study’s analysis of the distribution of Medicare by lifetime household earnings focused on future beneficiaries. Each individual in the sample from CBOLT had a complete history of earnings and household structure compiled from Social Security administrative data and from the CBO’s long-term projections, allowing the researchers to calculate lifetime household earnings at the individual level. The calculation of annual taxes and spending, along with projected life spans, allowed for analysis of how lifetime taxes and spending vary with lifetime household earnings. Medicare taxes consist mostly of payroll taxes from both employers and employees. For the 1950s cohorts, the administrative data included most of the earnings over the beneficiaries’ lifetimes.

Conclusions based on statistical persistence. By utilizing CBOLT the researchers were able to account for persistence in individual Medicare spending and taxes, which affects the distribution of lifetime outcomes. If an annual outcome persists, any shock to that annual outcome and any later shocks would accumulate. Therefore, accounting for persistence in an annual outcome could increase the dispersion in the corresponding lifetime outcome across individuals.

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