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Businessweek Archives

Medicare's Reverse Subsidy

Economic Trends


Money flows from poorer to richer

The Senate voted in June to require upper-income seniors to pay higher premiums for their Medicare insurance. President Clinton, while expressing support for the general idea of means-testing Medicare, forced Republicans to drop the plan. But new research suggests that the GOP was on the right track. When it comes to Medicare, lower-income seniors are paying the bills for better-off recipients. The reason: Rich people use more medical services, especially physicians' services. And they live longer, so they have more years to cash in on Medicare.

Economists Mark McClellan of Stanford University and Jonathan Skinner of Dartmouth College compared the lifetime cost of Medicare taxes with the flow of benefits from the health plan for the elderly. As expected, they found that today's retirees enjoy a substantial subsidy from today's workers: Benefits for a couple that turned 65 in 1990 will exceed the taxes they paid, on a present-value basis, by $33,600. But the researchers were in for a surprise when they looked at the flows of money within that age group. They found that each individual with an income below the median will transfer, on average, $800 to individuals with above-median incomes.

True, upper-income elderly have paid more taxes: A person in the top 10% of this cohort paid $7,600 more in taxes than one in the poorest 10%. But the better-off seniors use $8,600 more in lifetime Medicare benefits than do the poorest retirees.

Medicare was established in 1967, so today's elderly paid taxes for only part of their work lives. In contrast with today's retirees, McClellan and Skinner found that today's 52-year-olds--who were 22 when Medicare began--can expect an average subsidy from younger workers of only $2,200 per couple. But lower-income members of this group will still end up subsidizing richer ones.By MIKE MCNAMEEReturn to top


Even low-inflation areas see gains

After the experience of the 1970s, virtually all economists accept that high inflation damages an economy's long-term growth potential. But with price increases under a tight rein in the U.S. and other developed countries, debate remains over whether further reductions in inflation will pay off. Two Spanish economists examined 32 years' worth of data from the 24 largest developed nations and concluded: Yes.

In the experience of the 24 member countries of the Organization for Economic Cooperation & Development, cutting the inflation rate by one percentage point--from, say, 6% to 5%--added an extra 0.5% to 2% to per-capita income after a decade or so, say Javier Andres of the University of Valencia and Ignacio Hernando of the Bank of Spain. Significantly, the economists found that the gains were as large or larger when inflation dropped from 4% to 3% as when central banks were reining in the double-digit price hikes of the late 1970s. The economists didn't investigate what happens as inflation approaches zero.By MIKE MCNAMEEReturn to top


Few immigrants wind up in jail

Debates over immigration are fueled by the perception that today's new arrivals aren't coping in American society and are winding up in prisons and other institutions at an alarming rate.

Not so. A new study by economists Kristin F. Butcher of Boston College and Anne Morrison Piehl of Harvard University finds that among men 18 to 40 years old, immigrants are much less likely to be in institutions--prisons, mental hospitals, and drug-treatment centers--than are the native-born. Indeed, they conclude, "if natives had the same institutionalization probabilities as immigrants, our jails and prisons would have one-third fewer inmates."

The trend holds for every racial group: In 1990, 1.2% of native-born, non-Hispanic white males were institutionalized, vs. 0.8% of similar immigrants. For Hispanics, 4% of native-born men were locked up, vs. only 2.1% of immigrants.

The findings would seem to ease fears that jobless immigrants will turn to crime to make a living. Unfortunately, the researchers found that assimilation into U.S. society is a mixed bag: The longer immigrants have been in America, the closer their incarceration rate approaches that of the native-born.By MIKE MCNAMEEReturn to top

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