A Stitch in Haste

To review: Health care, like any other good or service, is scarce and must therefore be rationed. The only question is how it will be rationed: by private market forces as determined by patients, physicians (and, yes, insurance companies) — or by politicians and bureaucrats.

The inability to see this simple economic truth — that we cannot give everyone all the health care they want — is the primary explanation for the looming Medicare crisis. The only solution for said crisis is developing the ability to see said economic truth.

Armed with that:

There’s one important idea lurking in the shadows that neither campaign is keen to talk about: paying out government benefits more efficiently. To put it bluntly, it means paying out full benefits only to those who really need them, and cutting back on payments to everybody else.
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“Means testing” — cutting back on payments to the relatively wealthy — is one way to better allocate benefits. For health care costs, this could be done by expanding Medicaid, which is focused on the needs of the poor, and making it an entirely federal program rather than one partly paid for by the states. At the same time, the government would need to limit the growth of Medicare, which is universally applied to all elderly people; as a segment of American society, the elderly are relatively wealthy. With limited resources, it would be better to reallocate health care subsidies toward the poor, whether they are young or old.

In other words, slough off once and for all the delusion that government can provide true “universal health coverage.” No economy can provide universal anything. Rationing is required as a simple principle of metaphysics. And means testing Medicare, Tyler Cowen posits, is as defensible a rationing scheme as any other (e.g., this scheme from earlier today).

Cowen’s proposal is all well and good, as far as it goes. But it omits one small detail, as I noted in a comment at his blog.

I guess we’re just supposed to forget the pesky fact that “the rich” pay a lifetime of Medicare taxes (with no wage cap as with Social Security) and just meekly accept the notion that they’re no longer entitled to benefits. You yourself note that “lifetime earnings” should be the mean-test, but “lifetime taxes” suddenly become irrelevant. Go figure.

If we’re going to means-test Medicare, then can we at least be intellectually honest about it — by eliminating the Medicare tax, raising federal income tax rates by the requisite amount, and presenting Medicare for what it would in actuality become: a health-care dole for the (somehow) “indigent” middle class [elderly].

Here is what I was referring to in Cowen’s piece:

The best option is probably to tie the size of Medicare benefits to a person’s lifetime income, which is relatively easily measured and hard to game, rather than to one’s income or assets in any current year. In essence, higher earners would receive lower benefits instead of facing the prospect of higher taxes, as current trends predict. This policy reflects an ethic of individual responsibility — namely, that people who have earned well throughout their lives should be expected to take care of themselves, precisely so that the truly unfortunate can be helped.

I’ve exposed this contradiction before in the context of Social Security, especially calls to repeal the wage cap (with or without a “donut hole“). If the purpose of Social Security is to paternalistically force people to buy a retirement annuity, then scrapping the cap makes no sense. The only way to legitimize scrap-the-cap is to acknowledge that Social Security is in fact not paternalistic “forced saving” but simple redistributionist taxation from rich to poor with a meaningless intergenerational overlay.

Now, if you have no problem with the idea of “simple redistributionist taxation from rich to poor with a meaningless intergenerational overlay,” then so be it. But in that case, let’s just scrap Social Security taxes altogether, raise federal income tax rates by the requisite amount, and provide a means-tested old-age pension to the poor, without all the bells and whistles of payroll taxes, “quarters of work,” wage replacement formulas and all the other gobbledygook that is associated with Social Security.

And let’s also call it what it would be: The dole. Intergenerational welfare.

The problem, of course, is that people don’t like to think of themselves as being on welfare. There’s a stigma attached to it. FDR’s New Deal socialists knew this full well, hence the notion of “contributions” (not “taxes”) and so on.

So too with Medicare: You either pay for your own benefits (current system) or you pay for the poor’s benefits (Cowen’s proposal). Either framework is defensible, but not simultaneously — the two paradigms are mutually exclusive.

And what is not only mutually exclusive but downright schizophrenic is the notion that the benefit framework of the latter should be funded by the revenue framework of the former. If Medicare is to be means tested, then the only legitimate way to do so would be to strip away all the formulaic detritus, repeal the Medicare tax, raise income taxes by the appropriate amount and tell the poor (who, one would presume, would be grateful for the welfare handout): You’re welcome.

More thoughts from Will Wilkinson.

Filed under: Libertarianism, Social Security, Socialized Medicine