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Will the Medicare Eligibility Age Go Up?

Sunday, December 9th, 2012

The eligibility age for Medicare came under scrutiny in Washington last week, when some pundits and politicians debated raising the eligibility age from 65 to 67. Will they really do this? And if so, why?

You’ve probably heard of the “fiscal cliff,” a combination of tax increases and budget cuts that go into effect on January 1 if Congress does not pass a law to stop it. The White House and top congressional leaders are trying to negotiate a compromise bill that could pass in both the Republican-controlled House and the Democratic-controlled Senate.

By all accounts, these negotiations are not going well. The White House insists that marginal tax rates must go up for the top 2 percent of income earners, but Republicans say they won’t vote for that. Republicans talk about “entitlement reform,” which usually boils down to some privatization of Medicare and Social Security, and Democrats say they won’t vote for that.

To break the impasse, a number of pundits and politicians  proposed raising the eligibility age of Medicare from 65 to 67. They argued that Republicans might be persuaded to accept an increase in marginal tax rates for upper income earners, which Democrats want, in exchange for cutting cost out of Medicare.

We don’t know whether the negotiators are seriously considering a change in Medicare eligibility. But if they are, what are the pros and cons?

Raising Medicare Eligibility Age: Good Idea?

Last year, the Congressional Budget Office estimated that raising the Medicare eligibility age would save the federal government $113 billion over the next decade. This estimate assumes the change in eligibility age would be phased in gradually over 13 years. The Kaiser Family Foundation estimates that $5.7 billion could be saved in 2014 alone. This would go a long way toward keeping Medicare solvent for many more years.

Proponents of this argument say that once “Obamacare” goes fully into effect in 2014, seniors waiting to go on Medicare will be able to get insurance through the health insurance exchanges. Insurers will not be allowed to refuse to insure seniors even if they have severe health problems, even something life-threatening such as mesothelioma.

Raising Medicare Eligibility Age: Bad Idea?

Private insurance, even when purchased through the exchanges, would almost certainly be more expensive than Medicare. What’s more, adding 65- and 66-year-olds to the private insurance risk pool would raise insurance costs for younger folks in the same pool. At the same time, taking 65- and 66-year-olds out of the Medicare risk pool would leave a smaller, and older, pool of Medicare recipients. This means their costs would go up also.

Some seniors will postpone retirement so they can continue to receive employee health benefits. However, this will increase their employers’ insurance costs, because the older folks are likely going to be the most expensive to insure.

Further, as many as 5 million 65- and 66-year-olds would probably go on Medicaid and other programs. Much of this cost would be absorbed by state governments.

When added together, the costs that would be passed on to seniors, employers, and state governments would be just about double what the federal budget would save. In other words, for every dollar saved in the federal budget, 2 dollars will be taken out of the economy elsewhere. Saving the federal government $5.4 billion in 2014 would cost individuals, employers, and states about $11.7 billion in 2014.

Some economists argue that taking that much money out of the economy will hurt the economy more than the large budget deficit. However, it may be a price that has to be paid to get Republican votes for any compromise.