Extending the Medicare Base

President Obama's proposal to extend the 2.9% Medicare tax from its current base (wages and self-employment income) has been met with cries of socialism, Obamanation, and a number of less printable labels.  Virtually all of the attacks on the proposal ignore the underpinnings of how Medicare is currently financed.

 Unlike health insurance that we (or our employers) buy from insurance companies, the premium (the 2.9% tax) is paid years in advance, and it is not based on anyone's expectation of how healthy each of us will be.  Instead, it is based solely on the wages we earn.  If I earn $15,000 a year and my employer pays herself $150,000 from her small business, I will pay one-tenth of what my boss pays, but I will receive the exact same coverage.  In fact, if I am married and my boss is single, I will receive twice the benefits for one-tenth the cost.

Without a doubt, my boss is heavily subsidizing my coverage, but the subsidy has nothing to with Obama.  It has been around as long as Medicare.

If I postulate a local investor who makes $1,500,000 a year by buying and selling vacant land, the investor pays no Medicare taxes at all, but at the risk of not being entitled to Medicare coverage.  On the other hand, if the investor forms a one-man management company and pays himself a $7,500 per year salary, he will receive the same coverage that I have at half of my price.

Therefore, all three people receive precisely the same coverage.  The investor makes $1,500,000 and pays the least.  I make $15,000 and pay twice as much.  My boss makes $150,000 and pays twenty times as much.  My boss is heavily subsidizing both me and the well-heeled investor.

This example shows why extending Medicare beyond wages is fair.  Extending it has nothing whatsoever to do with job creation.  As shown in the example, my boss is the one who creates the most jobs, and yet currently she is the one who pays the highest subsidies.

These comments should not be construed as support for the use of Medicare dollars to pay for a new health care package.  Medicare has enough problems of its own, and any additional dollars could certainly be used to shore it up.  Alternatively, if it is decided the Medicare is already taking in enough money, the rate could lowered from the current 2.9% to compensate for the expansion of the base.