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Who Wants a Voucher?

Friday, 15 April 2011 05:24 By James Kwak, The Baseline Scenario | Op-Ed

In yesterday's post, I compared two ways of solving the long-term Medicare deficit: (a) increasing payroll taxes and keeping Medicare's current structure or (b) keeping payroll taxes where they are and converting Medicare into a voucher program. As a person who will need health insurance in retirement, I prefer (a), but others could differ.

Today I want to ask a different question. Let's say Medicare does become a voucher program along the lines proposed by Paul Ryan. So workers pay 2.9 percent of their wages and in retirement they get a voucher. According to the CBO, if you turn 65 in 2030, that voucher will pay for 32 percent of your total health care costs, including private insurance premiums and out-of-pocket expenses (see pp. 22-23). Would you rather have that deal or nothing at all?

At that point, I think a large and powerful minority of people would prefer to just get rid of what's left of left of Medicare. If you're young, why would you want to pay 2.9 percent of your wages for forty-five years in order to get back a voucher that will only cover a small fraction* of your health care costs for about twenty years? The Ryan Plan converts Medicare from an insurance program to a cash-shuffling program (you pay payroll taxes, you get back a voucher). At that point, since Medicare can't magically create value, the only thing to look at is whether you get back more cash than you put in, which depends mainly on how much money you make. If you're young and have a high income, it's pretty certain you won't get back what you put in, since your contributions are a function of your income and your benefits aren't; you would be better off investing the 2.9 percent in an index fund and using the returns to pay for health insurance in retirement.

In other words, when you convert Medicare to a voucher program, it becomes largely just a redistribution program. Low wage earners will do better than they would without the voucher program and high wage earners will do worse.

There is still a modest amount of insurance, in two forms: (1) Since you don't know for sure what your future income will be, the voucher program protects you against your income falling in the future. (2) Since the vouchers are like indexed annuities (the index is designed to be too low, but at least they pay out until you die), they protect you against living for too long. These features are similar to Social Security, and they certainly aren't worthless, so people in the middle will probably be better off with the voucher program.

But a voucher program eliminates three other types of insurance that traditional Medicare gives you: protection against (3) being medically uninsurable when you retire, (4) not being able to afford health insurance when you retire, and (5) health care inflation after you retire.** If you have a high income, there is a good chance that those are the protections you want from Medicare. High-income people aren't worried about (1) and (2), because those only affect how much cash they have to buy insurance with, and they already have a lot of cash. They are worried about (3), (4), and (5), because those affect whether they will be able to buy insurance at all.

As a result, high earners will begin asking why they should be contributing to low earners' vouchers instead of just putting the 2.9 percent in their own savings accounts to fund their own individual vouchers. Around 2024, when it becomes clear that "Medicare" is just an insufficient voucher program, Republican presidential candidates will begin campaigning on a platform of converting Medicare into individual, tax-advantaged health savings accounts. The rich will back those accounts (and they will be positioned to the poor as an "ownership opportunity") and even the redistributive part of Medicare will melt away.***

For the record, I think that even the voucher program would be better than nothing precisely because it still has a small insurance component and it still has a redistributive component. Those are good things. But a voucher program will have much less political support from the upper class than traditional Medicare has today, and that support will only weaken when people realize how insufficient the vouchers really are. At that point, "Medicare" will be just an unpopular payroll tax funding an unpopular voucher system.

Of course, this is probably part of the plan: first eliminate the parts of Medicare that matter most to people, so it becomes easier to eliminate the whole thing later.

But I would put this in a different light. The real problem today is an individual market that makes it difficult for people who are not covered by employer plans to buy decent health insurance at an affordable price. If we were to look at that problem and design a solution, would we come up with Paul Ryan's voucher program? Of course not. No one would think that would be a good idea, because it doesn't solve the real problem. The problem it does solve is current Medicare's projected fiscal deficit — which is an artifact of the way we're currently trying to solve the real problem.

If we were starting from scratch, we might have a single payer system. More likely, we would have a traditional Medicare system — just with a higher payroll tax and stricter cost controls. We would pay more than we currently pay and we would get an insurance policy that isn’t as flexible as the one we currently get. But we would still be solving the real problem. The Ryan Plan doesn't even try.

*For someone entering the workforce today, the initial voucher at age sixty-seven will pay for far less than 32 percent of her health care costs — and that percentage will continue to fall — because the vouchers are indexed to the CPI, not to GDP, let alone health care inflation.

**The Affordable Care Act gives you some protection from (1) and (2), but the Ryan Plan eliminates the parts of the ACA that give you that protection. Nothing protects you from (3).

***You might ask why this wouldn’t also happen with Social Security. Well, it might. But compared to Medicare, Social Security has a couple of things in its favor (politically speaking). First, it’s less progressive in two respects: payroll taxes are capped and the benefit formula is based on your contributions. So while it is redistributive, it’s not that redistributive, which helps it maintain the support of the upper-middle class. Second, and more importantly, Medicare has gotten the reputation of being a complete fiscal basket case, which makes radical transformation possible. Since Social Security’s deficit could be solved with relatively moderate tweaking, it makes it harder to argue for radical changes.


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Who Wants a Voucher?

Friday, 15 April 2011 05:24 By James Kwak, The Baseline Scenario | Op-Ed

In yesterday's post, I compared two ways of solving the long-term Medicare deficit: (a) increasing payroll taxes and keeping Medicare's current structure or (b) keeping payroll taxes where they are and converting Medicare into a voucher program. As a person who will need health insurance in retirement, I prefer (a), but others could differ.

Today I want to ask a different question. Let's say Medicare does become a voucher program along the lines proposed by Paul Ryan. So workers pay 2.9 percent of their wages and in retirement they get a voucher. According to the CBO, if you turn 65 in 2030, that voucher will pay for 32 percent of your total health care costs, including private insurance premiums and out-of-pocket expenses (see pp. 22-23). Would you rather have that deal or nothing at all?

At that point, I think a large and powerful minority of people would prefer to just get rid of what's left of left of Medicare. If you're young, why would you want to pay 2.9 percent of your wages for forty-five years in order to get back a voucher that will only cover a small fraction* of your health care costs for about twenty years? The Ryan Plan converts Medicare from an insurance program to a cash-shuffling program (you pay payroll taxes, you get back a voucher). At that point, since Medicare can't magically create value, the only thing to look at is whether you get back more cash than you put in, which depends mainly on how much money you make. If you're young and have a high income, it's pretty certain you won't get back what you put in, since your contributions are a function of your income and your benefits aren't; you would be better off investing the 2.9 percent in an index fund and using the returns to pay for health insurance in retirement.

In other words, when you convert Medicare to a voucher program, it becomes largely just a redistribution program. Low wage earners will do better than they would without the voucher program and high wage earners will do worse.

There is still a modest amount of insurance, in two forms: (1) Since you don't know for sure what your future income will be, the voucher program protects you against your income falling in the future. (2) Since the vouchers are like indexed annuities (the index is designed to be too low, but at least they pay out until you die), they protect you against living for too long. These features are similar to Social Security, and they certainly aren't worthless, so people in the middle will probably be better off with the voucher program.

But a voucher program eliminates three other types of insurance that traditional Medicare gives you: protection against (3) being medically uninsurable when you retire, (4) not being able to afford health insurance when you retire, and (5) health care inflation after you retire.** If you have a high income, there is a good chance that those are the protections you want from Medicare. High-income people aren't worried about (1) and (2), because those only affect how much cash they have to buy insurance with, and they already have a lot of cash. They are worried about (3), (4), and (5), because those affect whether they will be able to buy insurance at all.

As a result, high earners will begin asking why they should be contributing to low earners' vouchers instead of just putting the 2.9 percent in their own savings accounts to fund their own individual vouchers. Around 2024, when it becomes clear that "Medicare" is just an insufficient voucher program, Republican presidential candidates will begin campaigning on a platform of converting Medicare into individual, tax-advantaged health savings accounts. The rich will back those accounts (and they will be positioned to the poor as an "ownership opportunity") and even the redistributive part of Medicare will melt away.***

For the record, I think that even the voucher program would be better than nothing precisely because it still has a small insurance component and it still has a redistributive component. Those are good things. But a voucher program will have much less political support from the upper class than traditional Medicare has today, and that support will only weaken when people realize how insufficient the vouchers really are. At that point, "Medicare" will be just an unpopular payroll tax funding an unpopular voucher system.

Of course, this is probably part of the plan: first eliminate the parts of Medicare that matter most to people, so it becomes easier to eliminate the whole thing later.

But I would put this in a different light. The real problem today is an individual market that makes it difficult for people who are not covered by employer plans to buy decent health insurance at an affordable price. If we were to look at that problem and design a solution, would we come up with Paul Ryan's voucher program? Of course not. No one would think that would be a good idea, because it doesn't solve the real problem. The problem it does solve is current Medicare's projected fiscal deficit — which is an artifact of the way we're currently trying to solve the real problem.

If we were starting from scratch, we might have a single payer system. More likely, we would have a traditional Medicare system — just with a higher payroll tax and stricter cost controls. We would pay more than we currently pay and we would get an insurance policy that isn’t as flexible as the one we currently get. But we would still be solving the real problem. The Ryan Plan doesn't even try.

*For someone entering the workforce today, the initial voucher at age sixty-seven will pay for far less than 32 percent of her health care costs — and that percentage will continue to fall — because the vouchers are indexed to the CPI, not to GDP, let alone health care inflation.

**The Affordable Care Act gives you some protection from (1) and (2), but the Ryan Plan eliminates the parts of the ACA that give you that protection. Nothing protects you from (3).

***You might ask why this wouldn’t also happen with Social Security. Well, it might. But compared to Medicare, Social Security has a couple of things in its favor (politically speaking). First, it’s less progressive in two respects: payroll taxes are capped and the benefit formula is based on your contributions. So while it is redistributive, it’s not that redistributive, which helps it maintain the support of the upper-middle class. Second, and more importantly, Medicare has gotten the reputation of being a complete fiscal basket case, which makes radical transformation possible. Since Social Security’s deficit could be solved with relatively moderate tweaking, it makes it harder to argue for radical changes.


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