Obama Proposes Steep Medicare Cuts

The Obama administration wants to cut Medicare Advantage spending $175 billion over 10 years and to keep the estate tax at current, inflation-indexed levels.

The administration has included those goals in a 10-year budget blueprint released today.
The Obama administration also calls for increasing taxes on couples earning more than $250,000 per year and on individuals earning more than $200,000, and it would raise the tax on dividends for those earning above those amounts to 20%, from 15% today, starting in 2011.

Other tax changes for high-wage earners, such as reductions in the deductions for interest paid on home mortgages and on charitable contributions, also would be phased in.

Deferred compensation plans would be affected only if they were domiciled offshore.

Employees not covered by qualified retirement plans could save for retirement through automatic payroll deposit individual retirement accounts. Under the Auto IRA system, employees would be automatically enrolled in workplace pension plans–and would be allowed to opt out if they chose. Employers that do not currently offer a retirement plan would have to enroll employees in a direct-deposit IRA account that was compatible with existing direct-deposit payroll systems.

The authors of the budget blueprint also want to expand the "saver's credit" provision, which is designed to help moderate-income and low-income families who contribute to 401(k) plans or IRAs.

The blueprint authors would modify the existing saver's credit to provide a 50% match on the first $1,000 of retirement savings for families that earn less than $65,000. The credit would be fully refundable.

A copy of the budget blueprint is available here.

More details about the proposals should be available when the administration releases the full budget and an analysis of the budget this spring.

Cliff Wilson, president of the National Association of Insurance and Financial Advisors, Falls Church, Va., says the trade group's members support the provisions regarding the estate tax as providing certainty, and also support the provision that would allow employees not covered by qualified retirement plans to save through Auto IRAs, as long as employees have an opt-out provision.

The changes "very well" may provide opportunities for agents to sell tax-advantaged products, but above all else, "taxpayers must be confident that the economy will grow in order to ensure there are incentives available for people to plan for their future and to save for retirement, as well as invest in their business," Wilson says.

David Stertzer, chief executive of the Association for Advanced Life Underwriting, Falls Church, says the release of the budget proposal "should further activate what we expect will be a very busy legislative year."

He welcomed the provision that would extend the estate tax at the 2009 level.

"Providing a decision with permanence during this time of economic unrest will enable families and business owners to plan their financial future with certainty," Stertzer says.

The AALU will continue to seek to remove an "artificial and harmful barrier to planning by reunifying gift and estate tax exemption levels," Stertzer says.

Stertzer says the proposals to increase taxes on the wealthy are likely to be controversial.

"There will be many critical decisions in 2009 and 2010 with major implications for the life insurance industry and the broader public–tax reform, regulatory reform, employee compensation issues, and health insurance reform," Stertzer predicts.

The budget blueprint "is a post-stimulus bill kick-off of legislative consideration in which AALU and the broader life insurance industry will be heavily engaged," Stertzer says.

The Medicare Advantage proposal is a reaction to estimates that, under current law, Medicare spends an average of 14% more per Medicare Advantage plan beneficiary than it spends on the average traditional Medicare plan beneficiary.

The Obama administration wants to use the Medicare Advantage cuts to help pay for setting up a universal health coverage program.

Under the administration proposal, the current system for setting rates would be replaced with a competitive system in which payments would be based on an average of private plans' Medicare bids.

"This would allow the market, not Medicare, to set the reimbursement limits, and save taxpayers more than $175 billion over 10 years, as well as reduce Part B premiums," according to the authors of the budget blueprint.

Karen Ignagni, president of America's Health Insurance Plans, Washington, says the blueprint "sends a signal to the American people that this administration is serious about prioritizing health care."

But cutting Medicare Advantage support "would force seniors enrolled in Medicare Advantage to fund a disproportionate share of the costs to reform the health care system," Ignagni said. "A cut of this scale would jeopardize the health security of more than 10 million seniors enrolled in Medicare Advantage and would turn back the clock on innovative payment incentives to improve the quality of care that patients receive."

The Automatic IRA proposal was developed by the Retirement Security Project, Washington. The proposal was endorsed by both by Obama and by Sen. John McCain, R-Ariz., during the presidential election campaign.

"We are delighted to see that the president has included Auto IRA in his budget," says David John, a principal at the Retirement Security Project, Washington

The Auto IRA has "broad bipartisan, cross-ideological support, and has bipartisan support in Congress," John says.

Obama Proposes Steep Medicare Cuts

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