The Incidence of Medicare

Abstract

The Medicare program transfers more than $200 billion annually from taxpayers to beneficiaries. This paper considers the incidence of such transfers. First, we examine the net tax payments and program expenditures for individuals in different lifetime income groups. We find Medicare has led to net transfers from the poor to the wealthy, as a result of relatively regressive financing mechanisms and the higher expenditures and longer survival times of wealthier beneficiaries. Even with recent financing reforms, net transfers to the wealthy are likely to continue for at least several more decades. Second, we consider the insurance value of Medicare in providing a missing market for health insurance. With plausible parameter values, our simulations suggest that low-income elderly benefitted more than the dollar flows would suggest. Including this insurance value implies that, on net, there is faint redistribution from the highest income deciles to the lowest income deciles. We also consider the likely distributional impact of several proposed reforms in Medicare financing and benefits.