By Marilyn Moon, Center for
Medicare Advocacy Visiting Scholar
We are pleased
to present a new Issue Brief by Marilyn Moon – “Ensuring Medicare’s Financial
Health” – reviewing the fiscal solvency of Medicare and the Part A Trust Fund.
Highlights are provided here. The full Brief is available at https://medicareadvocacy.org/
wp-content/uploads/2021/05/Issue-Brief-Medicare-Solvency.pdf.
When Medicare
was originally passed, a schedule of tax rate increases was put in place, with
the expectation that more would be needed in the future. The original schedule
went from 0.35% to 0.8% to begin in 1987. Just two years later, that schedule
was increased to reach 0.9% in 1987 and after.
The rate of
0.9% was actually achieved by 1974. Since then it has been raised five
times to 1.45% in 1986. There have been no further rate increases since 1986.
In 1986, when
the last rate increase occurred, Part A spending totaled $50.4 billion, or 1.1
percent of GDP. There were 28.3 million beneficiaries enrolled in the program
at that time, about 11.4 percent of the population. By 2019, the total number
of enrollees had reached 60.9 million, 18.6 percent of the population and
spending was $328.3 billion, 1.52 percent of GDP.
Other changes
have helped keep the Part A Trust Fund solvent. The most important of
these lifted the cap on the level of payroll subject to tax. That change
occurred in 1994. In 2019, revenues to the Part A trust fund were about a third
higher than if the cap were set at the same level as for Social Security.
Since Medicare
was introduced, the role of payroll taxes has been declining. In 1970, payroll
taxes accounted for 61.8 percent of Medicare spending but by 2019 had fallen to
36.4 percent. This is largely because there has been a major shift of spending
from Part A, which is largely financed by payroll taxes, to Part B which is financed
by general revenues (75 percent) and premiums (25 percent). In 1970, Part B was
just 28 percent of the total program. In 2019, it amounted to 53 percent of
combined A and B spending. And if Part D spending is included, the payroll tax
share declines even further since it is also financed in the same way as Part
B.
When Medicare
was passed in 1965, the payroll tax applied to a greater share of GDP than it
does today. After being stable for many years, the share of our economy that
goes to labor has declined substantially since 2000, as interest and dividends
have grown. This is important in terms of how well the payroll tax base
represents growth in the economy. (Medicare is actually in better shape in this
area than is Social Security since the cap on wages subject to the Medicare
payroll tax was eliminated in 1994. For Social Security, the payroll tax cap is
still in effect, at $100,000, thus the share of wages subject to the tax has
also declined because wages for those with higher incomes have grown faster
than wages below the cap.)
If payroll is
a declining share, then the tax base is not keeping up with economic growth and
consequently it may become less adequate over time as compared to broader based
(e.g. income) taxes. This may be relevant in deciding whether to continue to
rely on the payroll tax to fund the Medicare Trust Fund.
Read the full
Issue Brief at: https://medicareadvocacy.org/wp-content/uploads/2021/05/
Issue-Brief-Medicare-Solvency.pdf.
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