Time for Fiscal-Cliff Plan C? Here Are 3 Options for Entitlements

Sophie Quinton and Nancy Cook

The White House is looking for a "Plan C" for the fiscal-cliff negotiations, after talks between the White House and House Speaker John Boehner have gotten off track. As President Obama and his aides turn to the Senate now for a possible compromise, everything is once again on the table: all the tax hikes and all of the possible spending cuts. This may include different or additional cuts to the government’s social safety-net programs.

Among the three top contenders for spending cuts, based on previous deficit-reduction negotiations: raising the Medicare eligibility age; making wealthy Medicare beneficiaries pay more; and indexing certain benefit programs and parts of the tax code to a slower-growing consumer price index, known in wonk-speak as “chained CPI.”

Before taking a closer look at the three perennial budget options, one caveat: While all the ideas on the table would cut spending, not one of them change the fundamental structure of the programs that consume a rising percentage of the federal budget.

“The difficulty with this exercise is, we’ve got locked into a 10-year window here,” said William Hoagland, senior vice president at the Bipartisan Policy Center and former staff director for the Republicans on the Senate Budget Committee. The White House wants to see 1.2 trillion in revenues over 10 years; Republicans would like to see a corresponding budget cut.

To get the numbers, negotiators have to rely on fixes that are easily scored by the Congressional Budget Office and that will demonstrate savings almost immediately. “You end up having to take on those policies that are scoreable in the near term, though they may not deal with the long-term fundamental problems,” Hoagland said.

1. Raising the Medicare Eligibility Age to 67: $148 billion in 10-year savings.

Raising Medicare’s eligibility age from 65 to 67 would save $148 billion through 2021, according to the CBO. Proponents argue that Americans are living longer, healthier lives than ever, and that raising the Medicare eligibility age would give older Americans an incentive to remain in the workforce. It’s also easy for politicians to explain to their constituents what this policy step would do.

But there are some serious and complicated downsides. Moving younger, healthier seniors out of Medicare would raise risk across the Medicare pool and push premiums up. It would push some older Americans into the new health insurance exchanges mandated by the 2010 health care law, pushing premiums up on the plans traded there, too. It would leave some older Americans reliant on Medicaid, burdening the states, and leave others reliant on their employers, burdening businesses. 

The biggest downside may be in the budget math: Raising the Medicare eligibility age by two years doesn’t really save that much money. That’s because the 65 year olds on Medicare tend to consume less health care than the very elderly.

2. Means Testing Medicare: $30 billion in 10-year savings

In Washington parlance, "means testing Medicare" roughly translates to "making wealthy seniors pay higher premiums." President Obama’s 2013 budget recommended increasing premiums on higher earners under Medicare parts B and D (in other words, on their doctors visits, medical supplies, and prescription drugs) by 15 percent starting in 2017. Usually, income thresholds rise with inflation. But Obama’s budget recommended freezing income thresholds until a quarter of beneficiaries end up subject to higher out-of-pocket costs. The proposal would save about $30 billion over 10 years, according to the CBO.

The fastest way to cut the cost of Medicare may be to shift as much of the cost as possible onto elderly beneficiaries. President Obama’s proposal may illustrate the maximum amount of cost-sharing Democrats are willing to accept—and as you can see, the savings are a drop in the bucket. 

Critics point out that the top 5 percent of Medicare beneficiaries—those with an income of more than $85,000—already pay higher premiums. The health care reform law has already established a freeze on income thresholds through 2019. Under the Obama plan, the threshold for higher premiums would end up being something like $47,000 in current dollars, according to the Kaiser Family Foundation.

Soaking the rich doesn’t work that well when it comes to Medicare, for a simple reason: Most beneficiaries are living off their savings, and most are not wealthy. Half the people on Medicare in 2012 had incomes below $22,500, according to the Kaiser foundation; a quarter had incomes below $14,000.

3. Switching to Chained CPI: $217 billion in 10-year savings

Indexing parts of the tax code and certain federal programs to a new consumer price index could raise about $72 billion in revenue and cut spending by about $145 billion through 2021, according to CBO’s 2011 calculations

Experts say that the new measure, called "chained CPI," captures the way household spending rises with inflation better than the current measure. It also happens to rise more slowly. Using chained CPI to index cost-of-living adjustments to federal pensions and Social Security payments would slow the growth of payments. It would also push taxpayers into higher tax brackets faster.

Critics say that switching to a chained CPI would burden the oldest and sickest Social Security beneficiaries. Although most major budget frameworks suggest the switch, they also suggest additional protections for the most vulnerable beneficiaries.