Raising the Medicare Eligibility Age with a Buy-In Option

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Introduction

As Americans live longer, we are spending more time in retirement and placing increased burdens on younger generations. Although labor supply at older ages has increased modestly in recent years, people generally retire at much younger ages today than they did 50 years ago. Retirees now collect Social Security benefits longer than ever before, and the number of workers supporting each retiree is falling steadily. Encouraging older Americans to delay retirement would ease the economic pressures of an aging population by expanding the pool of productive workers, in turn promoting economic growth and generating additional goods and services to raise living standards. Improved health and less physically demanding jobs mean that most of today's older adults can work longer than did earlier generations.

Population aging is also raising doubts about the affordability of health care promises made to older Americans, especially as health care costs continue to rise. Medicare provides subsidized health care to nearly all adults age 65 and older, but costs have been rising rapidly and are expected to soar once baby boomers begin to qualify for benefits. Unless policymakers are able to restrain the growth in Medicare spending, the program will soon lead to sharply higher taxes, unsustainably high federal budget deficits, or dramatic reductions in spending on other important federal programs.

While the federal government devotes substantial resources to Medicare, many older Americans too young to qualify for benefits lack adequate coverage. Most workers receive health benefits from their employers, but coverage options are limited for those who retire before age 65. Employer-sponsored retiree health insurance typically allows retirees to continue the coverage they had while working, although generally at higher costs. Fewer than half of full-time workers, however, are offered retiree health benefits from their employers, and employers continue to cut back or even terminate these benefits. Some married adults receive coverage through their spouses' employer plans, but only if their spouses are working or are fortunate enough to have retiree health benefits themselves. In the absence of employer coverage, retirees too young to qualify for Medicare must generally turn to the private nongroup insurance market, where coverage is often expensive and incomplete—especially for those with health problems.

Increasing the Medicare eligibility age to 67, combined with a buy-in option for people age 62 to 66, could potentially elicit more labor supply from older adults, reduce Medicare costs, and improve insurance coverage among older adults younger than 65. Gradually increasing the eligibility age would bring it back in line with Social Security's full retirement age, which slowly began rising from 65 to 67 in 2000. Boosting the Medicare age would also reinforce other signals in society that old age does not begin until after 65; furthermore, an increase in the cost of retiring early would likely encourage older workers to remain in the labor force. Participants in a buy-in plan would gain full Medicare coverage by paying monthly premiums equal to the expected cost of their benefits. Premiums could be subsidized for low-income adults. The Clinton administration first proposed a Medicare buy-in option in 1998, and congressional Democrats have introduced similar legislation more recently; however, none of these plans has been enacted into law as yet.

This paper proposes increasing the Medicare eligibility age to 67, while allowing people age 62 to 66 to buy into the program. The analysis explores the potential impact of the proposal on coverage rates at older ages and on Medicare costs. The findings show that a buy-in plan could improve coverage for near-elderly adults, but only if the plan subsidized premiums for those with limited incomes. Moreover, unless the buy-in option were heavily subsidized for low-income adults ages 65 and 66, increasing the eligibility age would leave many poor older people and many older African Americans and Hispanics without coverage. Costs savings would be modest because the Medicare beneficiaries who would be dropped from the program would, for the most part, be relatively healthy and, therefore, low-cost.

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Disclaimer: The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.