Wash. Post's Marcus: “80 percent of those with employer-sponsored coverage” unaffected under Bush health care proposal

Washington Post columnist Ruth Marcus claimed that “80 percent of those with employer-sponsored coverage” would be “unaffected” under President Bush's health care proposal. But, in fact, most workers with employer-sponsored coverage would presumably be affected, because they would pay less into Social Security -- and therefore receive smaller payments when they retire.

In Ruth Marcus' January 24 Washington Post column, in which she wrote that Democrats' opposition to President Bush's health care proposal stems from a “knee-jerk ... suspiciousness” of anything Bush proposes, Marcus claimed that “80 percent of those with employer-sponsored coverage” would be “unaffected” under the plan. Bush's proposal would replace the tax exemption employees now receive for employer-provided health coverage with a standard payroll- and income-tax deduction of $7,500 for individuals and $15,000 for families. Marcus' assertion that “80 percent of those with employer-sponsored coverage” would be “unaffected” under the plan is simply false, as noted by Dean Baker, co-director of the Center for Economic and Policy Research. Many of those workers would be affected by Bush's proposal because the deduction amounts would also be exempted from payroll taxes, including Social Security. Because workers would pay less into Social Security, they would receive smaller payments when they retire.

In a January 24 column (subscription required), Wall Street Journal business columnist Alan Murray explained one effect of the proposal on taxpayers:

Here's how the plan would work: The government would give every family with health insurance a standard deduction from income taxes of $15,000 ($7,500 for a single person). For people who buy their own health-care insurance, this would be an instant windfall because their insurance costs aren't deductible now. Those without health coverage would have a big incentive to buy it.

For people with employer-provided health insurance, however, the benefit is harder to calculate. All employer health-care payments would be reported as income, and the employee would have to pay taxes on them. If the payments totaled less than $15,000, the family's tax bill would go down under the Bush plan. If they totaled more than $15,000, the tax bill would go up.

But, in addition, the proposal would exempt the same amounts from a worker's payroll taxes. As Baker wrote on his weblog Beat the Press, that would mean many workers would contribute less into Social Security and would end up receiving a smaller Social Security benefit upon retirement:

The initial response to President Bush's new health care proposal indicates that it is unlikely to go very far, but it is still worth considering its implications. The basic principle is reasonable, even if it does little or nothing to address the real problems of the country's health care system: it equalizes the tax status of health insurance regardless of whether it is purchased through an employer or by an individual worker.

Of course a tax break matters much more to taxpayers in high income tax brackets than to low-wage workers with little or no tax liability. But, President Bush has something for low wage workers also. Under his plan, a worker who buys a family plan would pay no payroll tax on her first $15,000 of income. Since the combined employer/employee tax is 15.35%, this would mean a substantial tax break even for low wage workers. (It's not clear from the proposal if workers would get the employer-side payment refunded.)

But, there is a flip side to this tax break. If workers pay less money into Social Security, they would also get less back. To take an extreme case, imagine a worker whose pay averages $20,000 a year. Currently, this would [sic] salary would get this worker $11,000 if she started collecting benefits at the normal retirement age. Under President Bush's proposal, the worker would only be credited with $5,000 a year towards her Social Security benefits, getting her $4,500 a year when she retires. This is a big difference.

As I said, it seems unlikely that President Bush's health care plan will go anywhere. However, insofar as it is taken seriously, the media should explore all its implications, especially its implications for the Social Security benefits of low wage workers.

A January 23 Urban Institute report examining Bush's health care proposal further explained the issue:

The 35 percent of households under age 65 who do not owe any income tax would likely get no tax benefit for purchasing health insurance because their current reduction in payroll taxes would be largely offset by reduced Social Security benefits in retirement. For example, if a low-income worker purchased insurance in the individual market, his payroll taxes under the proposal would go down by $1,148 (or the 15.3 percent rate multiplied by the $7,500 exclusion). But, his future Social Security benefits would also go down by nearly as much in present-value terms as the current payroll tax savings.

It is important to note that most of the people who save on payroll taxes would receive smaller Social Security benefits in retirement. For low- and middle-income families that gain health insurance (and a $15,000 reduction in Social Security earnings), this could translate into a very substantial drop in retirement living standards.

In her column, Marcus noted the administration's claim that workers in the bottom 80 percent of income earners would, on average, “save money” in the form of a tax break. But she did not mention that the administration's 80 percent-20 percent grouping would likely be accurate only in 2009, as the Urban Institute report explained. If the cost of health care insurance premiums continues to increase far more rapidly than the rate of inflation, the amount of health care coverage cost that would be covered by the proposed deduction would likely fall significantly. According to the report, only about 60 percent of health care plans would be entirely deductible 10 years after the proposal is enacted.

Who is affected. The administration estimates that the average premium will be about $13,500 for family coverage in 2009, and that 75 to 80 percent of employer premium contributions will come in under the deduction amount. By the tenth year of the proposal about 60 percent of plans would fall under the standard deduction. Plans with premiums that exceed the deduction will be especially generous, be in areas with high health care costs, or be covering groups with especially high risks (e.g., chronic illnesses). The deduction will be indexed for inflation using the CPI for all goods and services. That broad price measure has historically been less than the CPI for health care costs, which has itself historically been less than premium growth that reflects both rising prices and higher health consumption.

From Marcus' January 24 Washington Post column, titled “The Knee-Jerk Opposition” :

It's too bad, because the president's proposal to cap the deductibility of employer-sponsored health insurance deserves more of a chance than Democrats, from their initial reactions, seem inclined to give.

Instead of the irrational current system, in which all employer-sponsored health-care costs are deductible, Bush would create a standard deduction that would replace existing deductions for health insurance, both employer-sponsored and privately purchased, and other medical costs.

The deduction would be $15,000 for a family policy, leaving 80 percent of those with employer-sponsored coverage unaffected.


And so what do Democrats say when a Republican president suggests doing something along these lines? “It's a bad policy,” House Ways and Means Committee Chairman Charles Rangel (N.Y.) told the New York Times. “We are trying to bring tax relief to the middle class. The president is trying to increase their tax liability.” Likewise, the Senate Democrats complained: “President Bush's Health Insurance Proposal Amounts to a Tax Hike for the Middle Class.”

This is flat wrong: According to the administration's analysis, on average, the top fifth of taxpayers would face a tax increase; the rest would save money.