Retirement Matters
July 2022
Read about new developments to address the Medicare deficit and lower prescription drug prices, and the market environment impacting global investments.
Medicare’s Deficit — Medicare is expected to run out of funds to pay full benefits by 2028. About 47 million retired workers receive Medicare to pay for higher priced medical expenses. The projected Medicare deficit is largely due to demographic factors: more aging baby boomers are collecting benefits while a declining birthrate results in fewer wage earners available to pay the payroll taxes from which Medicare is financed. In early July, Senate Democrats agreed on a new tax plan for high-wage earners only, to shore up the estimated deficit. All 50 Senate Democrats agreed to the tax plan, following a separate agreement to lower prescription drug prices.
3.8% Tax — The new tax plan features a 3.8 percent health surcharge on some income from high income earners. This is in keeping with the Administration’s commitment not to increase taxes on those making less than $400,000. Most U.S. businesses are not subject to the corporate income tax. Instead, their profits flow through to owners and are then taxed under the individual income tax. The new plan would close the loophole for individuals earning $400,000 or more a year that has allowed them to avoid a 3.8 percent tax on some income from pass-through businesses. In addition, this tax change also includes couples, trusts, and estates making at least $500,000.
Pass-through Businesses — The tax proposal impacts pass-through businesses, including sole proprietorships, partnerships, and S corporations. A law firm or medical practice is a familiar example of this type of business. In a pass-through business, its income currently is exempt from the existing 3.8 percent Medicare surtax on investment income. The proposed legislation would extend this Medicare surtax to the business income of these pass-through entities when that income reaches the $400,000 threshold. The additional tax would increase revenues for Medicare by an estimated $200 billion over a ten-year period and help extend Medicare’s solvency through 2031.
Action Needed — Enacting this bill is a significant step toward closing the deficit and ensuring the solvency for financing Medicare. But, getting the legislation approved has been difficult. It’s important to resolve the Medicare deficit sooner rather than later. That way, it provides us with more time to prepare for changes, and a larger number of solutions can then be considered and phased in gradually over a longer time period.
Reconciliation Process — Recently, the chance for passing the bill has improved now that Sen. Joe Manchin (D-West Virginia), a key swing vote in the evenly divided Senate, is supporting the plan. Previously, he objected to the administration’s Build Back Better bill that included the proposal. Backers are hopeful that they can avoid the Senate filibuster, which requires 60 votes to pass a bill. Instead, they would like to gain approval with a simple majority vote if the reconciliation process can be used. The tax plan will be submitted to the U.S. Senate Parliamentarian to determine if it complies with the special budget process that allows it to be adopted with a simple majority. Positive votes from Sen. Joe Manchin and Sen. Kyrsten Sinema are essential for passing the legislation using that process.
Medicare Prescription Drugs — Medicare’s deficit is also strained by the increasing cost of prescription drugs. Prescription drug prices in the U.S. are significantly higher than other nations. In the U.S., prescription prices average more than two and a half times more for drugs than 32 other countries. Allowing Medicare to lower the price of prescription drugs has wide-spread support from the American public with more than 80 percent of Americans in support of actions to allow Medicare to negotiate and place caps on the rising cost of drug prices. Currently, federal law prohibits the Medicare program from negotiating the price of drugs with manufacturers. The public believes that drug company profits are the largest factor contributing to prescription drug price increases. Seniors are shouldering the high drug costs from excessive out-of-pocket expenses. The existing Medicare drug benefit results in many patients paying high prices. Retirees are paying a percentage of the cost of expensive drugs with no cap. As a result, those needing expensive drugs, for cancer and autoimmune conditions, are spending $15,000 or more a year on these medications.
Negotiating Prices — The new bill allows Medicare to directly negotiate prescription drug prices. Out-of-pocket costs would be capped at $2,000 per year. Limits would be placed on the amount the drug companies are able to increase prices each year. More vaccines would be free to patients. The current bill is a step in the right direction, but will be less effective at lowering drug prices than the original proposal. It would allow Medicare to negotiate the medication price of no more than 20 drugs per year and only those that have been in existence for a while. This is a small portion of the drugs seniors use, so U.S. drug prices will not be reduced to lower price levels found in our peer countries. Lowering Medicare prescription drug prices would save the federal government an estimated $300 billion over a ten-year period.
State Investment Board — On another topic, the Department of Treasury, State of Michigan Investment Board (SMIB), met on June 23, 2022. The board reviewed the market environment impacting investments for the first quarter of 2022. Most of the global financial assets sustained losses for this quarter. Supply shortages, due to COVID-19 impacts, pushed inflation to 1980 levels. In February, Russia invaded Ukraine, and countries responded by imposing sanctions that disrupted Russian oil and natural gas supplies, driving up fuel prices that worsened inflation that was already high. To fight these pressures, the Federal Reserve raised interest rates in March, and again in May, by half a percent. If the Russia-Ukraine conflict continues to put upward pressure on energy prices that slow economic growth, the Federal Reserve may be less likely to continue interest rate increases.
Editor’s note: Joanne Bump serves as feature columnist for “Retirement Matters.” Column content is time sensitive and is based on information as of 7/10/2022. Joanne can be contacted by e-mail at joannebump@gmail.com.
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