Monday, July 20, 2009

Footing the bill

Leaving aside the merits of the current health care legislation being debated in Congress I thought it would be interesting to focus on how it will be paid for. A lot of attention has been given to a plan circulating in the House that would implement an income surtax of between 1 to 5.4 percent. But will that be enough to pay for it all?

While no one can say for sure, an examination of the taxes that are devoted to Medicare and Social Security do not give cause for optimism. Since its inception in 1965 Medicare has been funded by a 2.9 percent payroll tax evenly split between the worker and employer at 1.45 percent each. Until the end of 1993, however, the amount of income subject to the tax was capped, while beginning Jan. 1, 1994 that limit was repealed -- a massive tax increase.

It's a similar story with Social Security, where both the amount of income subject to the tax as well as the tax rate itself -- paid by both workers and employers -- has been on a steady upward trajectory. Here are a couple of graphs that I made based on this data provided by the Social Security Administration:

From 1937 to 1990 the tax rate increased from 1 percent to 7.65 percent.

Using constant 2006 dollars the amount subject to the tax has more than doubled from $41,730 to $94,200.

The trend is unmistakable. If taxes to pay for health care reform prove sufficient to pay for the program without any increase it would be unprecedented.


Ben said...

Hey Colin,
Doesn't your comparison between Social Security and Health Care overlook the important question of where the cost comes from? The average life expectancy of Americans has dramatically increased since 1937 (almost 25%) and with that both the number of recipients of Social Security and the duration of dependence on it. A good healthcare plan would presumably not require similar expansion overtime. Unless, of course, you believe that the effect of the program will be to drive people out of private providers and into the public option.

Colin said...

Well, life expectancy is but one component. The other is a demographic shift that means the number of workers supporting retirees has declined from 16 in the 1930s to 3.3 today.

I don't see any reason why life expectancy won't continue to climb and the demographics facing the U.S. aren't projected to improve with the Boomers just now starting to retire.

Ben said...

No, but Social Security was designed such that only a small percentage of citizens would actually be able to collect and failure to continue to raise collection age to keep pace with life expectancy (along with the inversion of contribution/collection) contributed to the increase in taxes. Presumably nearly the whole population would be captured by a healthcare plan and so a similar expansion of eligibility wouldn't drive taxes in the same way.

Colin said...

Presumably nearly the whole population would be captured by a healthcare plan and so a similar expansion of eligibility wouldn't drive taxes in the same way.

If you listen to advocates for the health care legislation -- most notably President Obama -- the public option is just that, an option that will NOT capture the whole population.

I suspect, however, that the public option is but an intermediary step towards single payer and that the goal is to capture the entire population. Therefore the number of people enrolled in the program should rise over time.

Other considerations: When is the last time that the CBO either accurately or overestimated the cost of a new program (serious question)? Seems to me that there is a bias towards underestimation.

Further, the practicality of a surtax paying for health care strains credulity, especially one on the rich. They are very good at hiding income and avoiding taxation (look at a history of effective taxation rates -- they are remarkably constant over time). I suspect that a surtax would prove inadequate and that other revenue streams would have to be found.

Lastly, it seems to me that continuing life expectancy and demographic changes will drive costs ever higher as the number of elderly expands and they live longer, consuming more health care.

Ben said...

I wasn't referring to the Public Option but the overall reform plan. Your point about taxation is well taken. I think the CBO endeavors to provide accurate, nonpartisan estimations - that is its mission, at least.

Colin said...

No, I didn't mean to impugn the good folks at the CBO, it just seems that things always seem to cost more than whatever you originally budget for. And take more time.