Researchers find that Social Security reform decreases Medicare spending
The existing literatures on Social Security and Medicare explore each of these significant allocations of federal budget in isolation. There has been no work to date on the manner in which these programs interact with one another. Did Social Security Amendment of 1983 affect governmental Medicare spending? In their 2015 working paper “Medicare Expenditures, Social Security Reform, and the Labor Force Participation of Older Americans,” Yuanyuan Deng and Hugo Benitez-Silva [DBS] attempt to address this question by estimating the cost savings that Medicare derives from changes to the Social Security Old Age benefits system. The authors contend that a comprehensive evaluation of the impact of Social Security reform should factor in its spillover benefits from reduced Medicare spending on older adults.
Social Security reforms fall under two key provisions: increases in the Full Retirement Age (FRA) and the Delayed Retirement Credit (DRC), both of which have been shown to decrease Social Security benefit receipts. In order to offset this reduction in post-retirement income, the Labor Force Participation Rate has increased at older ages. If an older individual is covered by employer-provided health insurance, this delay in retirement will result in lower Medicare expenditures since private insurance will operate as the primary payer for health care expenditures, and Medicare will be a secondary payer. Moreover, the availability of employer-provided health insurance may also delay the decision to enroll in Medicare, resulting in reductions in Medicare expenditures overall. These are the channels that DBS set out to investigate.
The existing evidence on determinants of Medicare expenditures suggests that the availability of supplemental insurance actually increases Medicare spending, which runs counter to DBS’ hypotheses. However, this literature does not deal exclusively with the older demographic and fails to account for cost savings that emerge from having Medicare as a secondary payer and from delayed enrollment into Medicare, making DBS’ paper the first of its kind.
The authors use data from the Cost and Use files of the Medicare Current Beneficiary Survey (MCBS) over the period 1999-2010, with an estimation sample comprising elderly Medicare beneficiaries around retirement age (65 years and older). Since there are differences in the timing of enactment of DRC and FRA rules, some rules can affect one age cohort in the data and not another. By identifying the beneficiary’s birth year, the authors establish a beneficiary’s age cohort and the precise DRC and FRA rules to which the beneficiary was subject. The authors can now compare across different age cohorts to parse how outcomes for one cohort differ from another, based on changes in these DRC and FRA rules between cohorts.
The results of their empirical estimation reveal that workers who are covered by current employer-provided health insurance generate 26.4 percent lower Medicare expenditures relative to workers who are not covered. Moreover, spouses of workers who are covered generate an additional 35.2 percent savings in Medicare expenditures relative to spouses who are not covered by employer-provided insurance. After accounting for the effect of working and having employer-provided health insurance, individual DRC and FRA provisions continue to show a negative impact on Medicare expenditures and total health expenditures. The authors attribute this to cohort effects, arising possibly from increases in health investment between cohorts over time.
DBS estimate the average dollar reduction in Medicare expenditures for individuals with Medicare as a secondary payer at $4,568 per person, per year, for total savings of more than $2 billion across the system.Additionally, they estimate a reduction in Medicare expenditures of $838 million deriving from an increase in the number of individuals who have zero Medicare expenditures from Medicare being a secondary payer, for a yearly net saving of $2.89 billion (0.65 percent of total Medicare expenditures in 2010).
DBS further find that labor-force participation and employer-provided health insurance are significantly correlated with delayed enrollment in Medicare, which generates additional Medicare savings for each year that enrollment is delayed. Using comprehensive estimates for Medicare cost savings specific to each age group, survey year, and number of years delayed, DBS estimate an additional $333.67 million cost savings in any given year from delayed enrollment.
DBS conclude that Social Security Amendment of 1983 generated significant reductions in Medicare spending through labor supply and health insurance coverage. Future research promises to extend this analysis to the impact of Social Security reforms on disability benefits as they relate to Medicare spending.
Read the working paper.
Read the research brief.