Rethinking Retirement


Future of Medicare Up for Debate

Susan B. Garland

Workers approaching retirement -- and many current retirees -- should plan to sock away more money for future health care costs.



Used to be, it was politically dangerous to try to tinker with Medicare. Former Arizona Governor Bruce Babbitt lost the support of key Democrats in his bid for the 1988 presidential nomination when he talked about means-testing Medicare and other entitlements. And the 1988 Medicare Catastrophic Coverage Act, which would have significantly expanded coverage, was repealed soon after passage. The reason: Terrified lawmakers capitulated to furious higher-income seniors who were to be charged higher premiums than other beneficiaries.

SEE ALSO: Special Report on Navigating Medicare

Lawmakers and politicians don't seem quite as scared these days. Sure, seniors may still be shouting "Don't Touch My Medicare!" at town hall meetings. But as the federal budget deficit widens, the White House and congressional lawmakers in both parties are becoming bolder in calling for cutbacks in the popular health care program for the elderly. Some recommendations for Medicare cuts that would have been considered heresy a few years ago are now moving to the center of public debate.

Many of these proposals would shift more of the cost burden from the federal government on to beneficiaries. Workers who are approaching retirement -- and many current retirees -- should plan to sock away more money for future health care costs.

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The impetus for this shift: growing Medicare costs, which will explode as baby boomers become eligible for the program (the first of the boomers enrolled this year). According to the 2011 Medicare trustees report, the hospital trust fund, which is financed by payroll taxes, will be exhausted by 2024, five years earlier than projected the year before. Meanwhile, the costs of Part B, which pays for outpatient services, and Part D, the prescription-drug program -- both financed by beneficiary premiums and the federal government -- are consuming an ever-increasing share of the economy, according to the trustees.

Dallas Salisbury, president of the nonpartisan Employee Benefit Research Institute, says that "the federal government is proving to be the last to get in line" behind both the private sector and the states in reining in health care spending. Companies and many state governments, he says, have been cutting benefits and forcing beneficiaries to pay more.

Salisbury compares the political environment now to 1983, when Congress ended up following many recommendations of a bipartisan national commission on Social Security. "Everyone became adults suddenly. They said, 'Nobody wants to do this, but we don't have that option, so let's march down that aisle together,' " Salisbury recalls.

Signs of growing bipartisanship on Medicare are recommendations by two deficit-cutting commissions in the past year. A year ago, a distinguished panel of budget experts -- led by Alice Rivlin, budget chief in the Clinton White House, and former Republican Senator Pete Domenici -- proposed significant cuts for Medicare. Soon after, a congressional commission, headed up by Clinton White House Chief of Staff Erskine Bowles and former Republican Senator Alan Simpson, issued its own recommendations for benefit cuts and premium hikes.

The four testified November 1 before the congressional "super committee." The panel of six Democrats and six Republicans is scheduled on November 23 to recommend $1.2 trillion in budget savings over ten years. If they can't come to an agreement, across-the-board cuts will take effect in January 2013. Here are some Medicare ideas that are gaining traction among policymakers:

Limiting Medigap coverage. The Simpson-Bowles commission would prohibit Medigap plans, which help cover out-of-pocket costs not covered by basic Medicare, from covering the first $500 of an enrollee's cost-sharing liabilities and limit coverage to 50% of the next $5,000 in Medicare cost-sharing. Supporters note that Medigap plans lead to excessive use of health care. President Obama has proposed a surcharge on Medigap plans bought by new beneficiaries.

Higher Part B and Part D premiums. Currently, Medicare Part B premiums cover 25% of total outpatient costs, with the federal government picking up the rest. The Rivlin-Domenici plan would gradually raise the beneficiaries' share to 35% of costs.

About 5% of higher-income beneficiaries already pay higher premiums for Part B and for Part D. Obama has proposed extending the freeze on indexing income thresholds for inflation until 25% of beneficiaries pay the higher premiums.

Charging for home health care. Currently, beneficiaries pay nothing for Medicare home health care. Obama would impose a $100 co-payment for each episode, which is defined as five or more home health care visits not preceded by a stay in a hospital or a skilled nursing home.

Raising the Medicare eligibility age from 65 to 67. Legislation by Independent Senator Joe Lieberman of Connecticut and Republican Senator Tom Coburn of Oklahoma would raise the age gradually, by two months every year beginning with people born in 1949. Some experts believe that this will become more feasible when insurance exchanges under health care reform go into effect, because people in their sixties with preexisting conditions should have an easier time finding affordable insurance before Medicare kicks in.

Providing vouchers. The Rivlin-Domenici plan would, in effect, provide vouchers, or "premium support," which beneficiaries could use to enroll either in traditional fee-for-service Medicare or in a competing private insurance plan. The fixed premium-support payment would grow at a certain rate each year. If costs of traditional Medicare grow faster, beneficiaries who want to stay in the fee-for-service program would have to pay more.

Whether lawmakers will approve any of these specific proposals is far from clear. One thing is certain, though: Future beneficiaries will pay more out-of-pocket for their health care. As it stands now, a couple both age 65 living to average life expectancy could need as much as $295,000 to cover premiums for health insurance coverage and out-of-pocket expenses during retirement, according to Salisbury's group. A couple who lives to age 95 could need as much as $550,000. And these numbers do not include long-term-care costs.

The take-home message: You will need to set aside a lot of money to pay for your health care costs during retirement.

For more authoritative guidance on retirement investing, slashing taxes and getting the best health care, click here for a FREE sample issue of Kiplinger’s Retirement Report.



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