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No, Don't Raise the Retirement Age

President Obama hasn’t proposed increasing the eligibility age for Medicare. But would he agree to do so, in order to secure a broader agreement that raises taxes on the wealthy and avoids the automatic spending cuts set to take effect on January 1? Liberals are worried that he will—thanks in part to a pair of recent columns, one each by my friends Jonathan Chait and Ezra Klein.

Under the provocative headline, “Go Ahead, Raise the Retirement Age,” Jon argued that Obama would eventually have to make some sort of concession—and that, all things considered, making people wait a little longer to enroll in Medicare was the least unappealing option. Ezra suggested that the outlines of a compromise were coming into view, with Obama conceding on a higher Medicare age in exchange for somewhat higher taxes on the wealthy. The columns have provoked spirited, sometimes angry responses from fellow liberals. Responding to Jon, David Dayen wrote, “The idiocy on display here can hardly be believed.” (Jon then responded here.)

It might look like just another liberal food fight. It’s not. The issue here is very real. Obama has been crystal clear about his demands in this debate. Tax rates on high incomes must go up. The debt ceiling drama has to end. He has made no similarly ironclad statements about the Medicare age. Obama would prefer to reduce Medicare spending by continuing to reform the way it pays for goods and services. He's even proposed a series of such reductions. But if it took more to get the concessions he wants from the Republicans? If it took something else to get what he thinks is a major deal on fiscal policy? Under those conditions, Obama would probably agree to a higher Medicare age—just like he did in 2011, when he was negotiating with House Speaker John Boehner over how to increase the debt ceiling. "The president put it on the table once before," says a senior Democratic aide on Capitol Hill. "I wouldn't be surprised if he did it again."

The idea made me queasy back then. And it makes me queasy now. As both fiscal and health care policy, increasing the Medicare age from 65 to 67, even gradually, has very little to recommend it. The federal government would save money, yes, but only because state governments, employers and individual seniors would pay more. Overall, the nation would end up spending more on medical care, not less. That’s the very opposite of what public policy, including Obamacare, is trying to achieve.

That shortcoming has gotten a lot of attention lately. Here's what hasn't: The distributional effects of a higher Medicare age, although that's partly because the effects are complicated to sort out. According to the best available study, which comes from the Kaiser Family Foundation, 65- and 66-year-olds with incomes of less than 250 percent of the poverty line, or about $30,000 for a couple, would generally end up paying a little less in out-of-pocket medical expenses if the Medicare age went up. That’s because they’d likely end up getting insurance from Medicaid or through one of Obamacare’s insurance exchanges, which, at those low income levels, would offer better financial protection. So far, so good.

But the financial protection at higher incomes would be worse. Among those paying more would be 65- and 66-year-olds in households making just $45,000 a year for a couple, in today’s dollars—in other words, people who are middle class by any definition. Asking them to pay more, so that the poor pay less in medical bills, has a certain logic to it. But asking them to pay more, so that the wealthy pay less in taxes? That's hard to justify.

In addition, some of the poor would also end up paying more in medical bills, because they live in states whose elected officials are refusing to expand Medicaid. (The Kaiser Foundation study, published in 2011, assumed all states would expand Medicaid.) As best as I can tell, with very rough calculations, a few hundred thousand seniors olds would end up totally uninsured, because they wouldn’t have employer coverage, couldn’t buy it on their own, and wouldn’t have expanded Medicaid as an option.

Maybe the administration could figure out some way to protect those people—by, for example, holding the eligibility age at 65 in states that refuse to expand Medicaid. But given the complications inherent in such an approach, and the perverse incentives it might introduce, Obama might want to offer a different concession: an adjustment to the formula for Social Security benefits. Although Obama has not officially put forward this possibility during this round of negotiations, he has previously indicated a willingness to support it. And, unlike an increase in the Medicare age, it actually has policy merit.

Economists have long believed that the consumer price index (CPI) overstates inflation. And a change to the CPI, applied not just to Social Security but to the entire federal budget, would both reduce spending and increase revenue—producing about twice as much total deficit reduction as the higher Medicare age. Changing the benefits formula could have adverse effects on vulnerable groups, such as the poor and disabled; policymakers would have to adjust the formula specifically to protect them. (This paper, from the Center on Budget and Policy Priorities, offers a how-to guide.) But even with those adjustments, a change to the formula would represent a real cut in benefits. And it’d be adopting an idea from the Bowles-Simpson and Rivlin-Domenici deficit reduction plans. 

Maybe that wouldn't be enough for the Republicans, who, after all, still control the House of Representatives and can filibuster in the Senate. Maybe, as Jon notes, the idea of an increased Medicare has taken on huge, largely symbolic importance for Republicans. But Obama holds most of the negotiating leverage right now—enough, perhaps, to prevail on tax rates, the sequester, and the debt ceiling.

Holding out for Republican capitulation on these issues, without offering a major concession, would entail risk: Nobody knows, for sure, how consumers and investors would react to spending cuts and tax increases on January 1, or another standoff over the debt ceiling. Winning Republican support for extended unemployment insurance, or other measures to boost the economy and ease suffering, would become much more difficult. But agreeing to this particular Republican demand carries plenty of risk, too—for the president's party and, more important, for the vulnerable seniors they've pledged to protect.