It was one of those jaw dropping, rubbing your eyes, cleaning out your ears moments. Presidential hopeful Newt Gingrich, thought by many to be a frontrunner for the GOP nomination, went out on a limb and criticized his own party’s plans for Medicare reform. Speaking on Meet the Press, Gingrich said about the Republican plan:

I don’t think right-wing social engineering is any more desirable than left-wing social engineering. I don’t think imposing radical change from the right or the left is a very good way for a free society to operate.


Some may agree with Gingrich. Others, such as House Budget Committee Chairman Paul Ryan (R-WI), who crafted the plan, clearly disagree. But what is clear (beyond the fact that Gingrich has wounded his relationship with many conservatives) is that the future of Medicare is a politically charged topic that’s bound to attract a great deal of attention in the upcoming 2012 election. So what the heck is it all about?

Medicare is health insurance. The general idea is that you pay in to the system while you’re working so that you can benefit from Medicare later in life, most notably when you retire. In most cases, you are eligible for Medicare if you or your spouse worked for at least 10 years in Medicare-covered employment; you are 65 years or older; and you are a citizen or permanent resident of the U.S. If you aren’t yet 65, you might still qualify for coverage if you have a disability or with End-Stage Renal disease.

It is an enormous federal program. It’s been around for nearly fifty years, beginning when the Social Security Act of 1965, amending a former law, was signed into law by President Lyndon B. Johnson. Former President Harry S. Truman was the first Medicare beneficiary (he opted in for Part B coverage) and received the first Medicare card.

The idea behind Medicare was to provide taxpayer funded health insurance benefits for older Americans. This came about after concerns arose that many Americans could not afford coverage after retirement. In 1964, the Senate Special Aging, Health of the Elderly Subcommittee released a report which stated, among other things, that private health insurance was unable to provide the majority of older Americans with “adequate hospital protection at reasonable premium cost.” Shortly thereafter, with health insurance for older people a priority for many in Congress, Medicare was created.

Under today’s system, when you work, you pay into the Medicare system as part of your federal payroll taxes. You pay 1.45% of your pay and your employer pays in 1.45% for a total contribution of 2.9%. Unlike Social Security, there is no income cap, so all of your wages are subject to the tax; the cap on Medicare wages was removed beginning January 1, 1994.

With the new health care act, there are some changes to the way that taxes will be imposed for purposes of Medicare. Specifically, beginning in 2013, Medicare tax will be imposed at a higher rate of 3.8% on investment/unearned income for high income taxpayers. High income taxpayers means those individual taxpayers reporting income over $200,000 and married taxpayers filing jointly reporting income over $250,000. Investment income includes exactly what you’d think but excludes distributions from qualified retirement plans, including pensions and IRAs.

Additionally, also beginning in 2013, the health care act increases the Medicare tax on high income individuals by 0.9%, from 1.45% to 2.35% for wages over the income thresholds ($125,000 for married taxpayers filing separately, $200,000 for individual taxpayers and $250,000 for married taxpayers filing jointly). The employer contribution will remain the same at 1.45%. To be clear, the additional tax is imposed at the wages over those threshold amounts; amounts under the threshold will still be taxed at 1.45%. So, for example, if a single taxpayer earned $500,000, the first $200,000 would be taxed at 1.45% and the next $300,000 would be taxed at 2.35%. Self-employed taxpayers will have the same limitations; the additional 0.9% tax applies to self-employment income that totals more than the respective threshold.

At retirement, most taxpayers are eligible for “free” Medicare Part A coverage. I say “free” because technically, you have been paying for it all along. Other benefits under Parts B, C and D of Medicare are subject to eligibility restrictions and/or additional cost.

If you do the math – especially if you’re currently paying for your own health care insurance – you can see that these dollars don’t add up under these facts. Assuming a real median income of just under $50,000 for taxpayers, that means a total Medicare contribution of $1,450 per year. When you can find private insurance for those kinds of dollars, you let me know. And that, of course, is exactly the problem.

Medicare is a huge, expensive program. The scope and expense of the program is a problem for both parties. The Democrats tried to address the issue through the provisions in the new health care act. Most Republicans, however, including Gingrich and Ryan want to get rid of the new health care act altogether, saying that it doesn’t do enough to control costs, and replace it with another plan.

What Ryan has proposed – and Gingrich objected to – was to move Medicare to more of a defined contribution plan administered by the government but relying on private insurers. If you think you’ve heard the concept before, it is shades of the idea of privatization of Social Security proposed a decade or so ago.

In theory, opening up the market to competition should result in lower costs to consumers. Of course, that was the idea behind pieces of Obama’s health care plan, too. The problem is that doesn’t seem to happen with respect to private insurers. Costs for plans in the private sector have continue to climb since the new health care act was signed into law. This has alarmed many in D.C., forcing the Obama administration to investigate significant premium rate increases.

It’s not completely out of the question that the subsequent dialogue about increased premiums under the current health care act will further influence the direction of Ryan’s plan. The proposal has actually evolved over time with the most current version approximating the existing system for federal employees. Ryan has referred to it as a “premium-support model” where the government would pay the insurer directly, in effect subsidizing the cost of a plan chosen directly by the insured. What has taxpayers on edge about the plan, however, is that seniors will be responsible for the remaining share of their own medical costs. That means cost savings for the government but potential increases for taxpayers, depending on costs and benefits. The fear is that it might force seniors into choosing less desirable – but more affordable – plans.

You can read the complete details of Ryan’s plan here (downloads as a pdf).

It is, as Gingrich has articulated, a complete change from the existing system. But is it a welcome change? I get Gingrich’s comments, even as he is backing away from them. The proposal that Ryan is suggesting has many of the same system-based flaws evident in the current health care act.

The idea of handing over control of health care choices to Americans isn’t a bad one. But we’re asking seniors to make choices about health care providers and plans when they’re elderly, when they’re sick and when they’re concerned about how they’re going to pay for the rest of their retirement. It’s not the best of circumstances. And I don’t know about you, but I can’t make sense of those darn charts and brochures from insurance companies under the best of circumstances.

While there’s a lot of loud pushing and shoving about the 2012 plan, it’s important to note that there would be no real changes in Medicare under the proposal until 2022. That would allow for taxpayers under the age of 55 to adjust to the new changes. The eligibility age would bump to 67 by 2033. Another dramatic change.

Of course, change isn’t always bad. Winston Churchill once remarked, “There is nothing wrong with change, if it is in the right direction.” So, I ask you, is this the right direction?

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Kelly Erb is a tax attorney, tax writer and podcaster.

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