Why does an entry about a Medicare reform bill feature two preschoolers in the photo? Because H.R. 2, the bill the Senate will vote on next week, is about these kids’ Medicare benefit, and their share of the national debt.
Before the Easter recess, the U.S. House passed H.R. 2, a bill that combines the end of the annual “doc fix” charade with real, structural reforms to the Medicare system. With nearly 400 “aye” votes out of a possible 435, H.R. 2 was a rare example of a legislative juggernaut.
The Senate will take up the bill early next week, and ATR urges the upper chamber to pass this bill quickly and proudly, with lots of conservative support.
If you want to learn more about this bill, I would urge you to read my op-ed in National Review Online, or one by Grace-Marie Turner in Forbes, or a post by former CBO Director Doug Holtz-Eakin. They all explain in detail why H.R. 2 is good, conservative policy. They aren’t alone among conservatives (even the godfather of “Cut, Cap, and Balance” has endorsed it), though there are others who have their doubts.
Some in the Senate are concerned that the bill doesn’t save enough money with the structural reforms in order to justify ending the impending spending cut called “SGR.”
They lament that the wrong baseline was used (in fact, it’s the baseline everyone uses for Medicare reform, or did before a month ago).
They say that the structural reforms don’t create savings fast enough, too. It’s this latter point I want to address.
The most important structural reform in the bill is to increase means testing in Medicare. Already, Medicare has means testing in Parts B (doctor visits) and D (prescription drugs). H.R. 2 makes those means tests stronger. That means that, over time, more and more seniors of the future will be paying more and more of their own money for their own Medicare benefit.
We won’t know for sure until next spring when the Medicare Actuaries report is released, but this deeper means test should reduce the unfunded liabilities of the program by a lot. You see, the means test is indexed for inflation, but seniors’ income grows faster than that. If inflation grows at 2 percent per year, and your income grows by 5 percent per year, your income even after inflation will double every 25 years. It’s simple math.
The same will apply to this means test.
Social Security initial benefits are wage-indexed, meaning they grow faster than prices (about 3 percent per year after inflation). Social Security initial benefits will outpace the growth of inflation greatly over this century.
Pensions and other retirement savings grow far faster than inflation (most pension actuaries use 5 percent annual after-inflation growth as a solid predictor). Dividends tend to grow at the same rate as other retirement savings. That means all the money piling up in 401(k)s and IRAs will eventually push up the real income of seniors of the future.
These key components of income for the “seniors” you see in the picture will grow far faster than inflation over the course of this century. It’s a very reasonable expectation that the little girl getting her tonsils examined by her sister will pay for most of her own Medicare benefit, when she’s ready to retire in 60 or so years. So will her friends, and they will think of that as perfectly normal and fair.
By then, H.R. 2 will be an historical footnote of ancient memory. But the structural reforms H.R. 2 brought about will pay dividends for taxpayers long after we’re gone.
Is there more to be done? Absolutely. Does H.R. 2 solve the Medicare crisis? Of course not. But it’s a very solid down payment on doing so, it points the way forward for even further reforms, and it continues the process of shifting the Medicare program to the fully-funded, debt-free, and free market system we all want to move toward.
The Senate should pass H.R. 2 without delay.