Medicare's Chief Actuary Grades a Proposal to Hike Taxes on the Wealthy

A top Medicare official predicts that a tax bill could keep the program solvent for at least 75 years — if the bill raises as much money as supporters hope it will.

Paul Spitalnic, chief actuary of the Centers for Medicare and Medicaid Services, the federal agency that runs Medicare, made that prediction in an analysis of the possible impact of S. 1174, the Medicare and Social Security Fair Share Act.

What It Means

Agents and advisors who work with high-income clients may have to pay more attention to S. 1174, now that an agency has suggested that implementing it could keep Medicare solvent.

The Medicare Part A Trust Fund

Medicare trustees now predict the Medicare Part A hospitalization program could empty out a trust fund that helps pay the claims by 2031. At that point, tax revenue and premium revenue would cover about 89% of projected Medicare Part A bills.

The Net Investment Income Tax

Sen. Sheldon Whitehouse, D-R.I., wants to raise money to shore up Medicare by increasing the 3.8% net investment income tax. The tax affects the investment earnings of single taxpayers with modified adjusted gross income of at least $200,000 and couples with MAGI of at least $250,000 that file joint returns.

S. 1174

S. 1174 and H.R. 4535, a similar bill introduced in the House, would:

• Increase the net investment income tax rate to 5% for single taxpayers with modified adjusted gross income of $400,000 or greater and couples that file jointly with MAGI of $500,000 or higher.
• Apply the net investment income tax to earnings from active S corporations and the earnings of active limited partners of partners.

Spitalnic reported that analysts in the CMS Office of the Actuary believe that the proposed tax could keep the Medicare Part A program solvent for at least 75 years under the assumptions used in the Medicare trustees’ main solvency forecasts.

The trustees also create alternative solvency forecasts based on what the trustees think are more realistic assumptions about how Medicare really works.

Based on the alternative assumptions, S. 1174 could keep Medicare Part A solvent until 2052, Spitalnic estimated.

A Weakness

Spitalnic noted in his summary of the office analyst findings that the S. 1174 impact analysis has a big hole.

“The Office of the Actuary at CMS did not independently assess the reasonability of the revenue estimates for the stated provisions,” Spitalnic said.

One obstacle for Medicare could be that, if S. 1174 becomes law and works roughly as drafters expect, taxpayers could find ways to evade the extra net investment income taxes, or avoid paying the extra taxes by earning less income.

The IRS building in Washington. Credit: Diego M. Radzinschi/ALM