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Who Pays for Medicare?

Who Pays for Medicare?

Understanding Medicare Funding: The Taxpayers' Role

Medicare, a pivotal cornerstone of healthcare for America’s elderly, has its roots embedded in the taxpayer's pocketbook. The program's various parts, including the primary Part A, are entirely financed through taxes. This mandatory financial obligation is a hallmark of the Federal Insurance Contributions Act (FICA), which deducts a portion of every paycheck to fund social welfare programs, including Social Security and Medicare. For self-employed individuals, this deduction is captured under the 'self-employment tax.'

The foundational concept behind these deductions is the notion of a future benefit pool, a fund that individuals pay into through their working years. Theoretically, this represents a self-sustaining mechanism where everyone contributes to their future care. However, in practicality, it is the healthy, working population that predominantly finances the medical needs of older, more frail citizens.

Financial Burden and Medicare's Role in Mitigating It

The prospect of medical expenses in retirement is a significant concern for many Americans. Forecasts predict the average retiree could spend well over $200,000 in out-of-pocket medical costs as they age. With the baby boomer generation entering retirement in larger numbers and the over-80 population being the fastest-growing demographic, Medicare's role in mitigating these costs becomes ever more crucial.

Medicare is set up in such a way that it can shield this expanding demographic from overwhelming healthcare expenses. As of 2016, 1.45% of an individual's income was funneled towards Medicare. For high-income earners, an additional 0.9% surtax was applicable, underpinning the government's efforts to safeguard the financial stability of the elderly.

Medicare Part A: The Cost-Free Component with a Catch

Medicare Part A is unique in its structure. Individuals who have worked approximately ten years and paid into FICA are not required to pay premiums for this part of Medicare. However, there's a catch for those who have not paid into the system. In these cases, they can access Medicare Part A by paying a premium, which stood at $413 per month in 2016.

Even for those exempt from premiums, Medicare Part A is not entirely free. A deductible of $1,316 for each benefit period, usually related to hospitalization, is still applicable. Nevertheless, the burden of these out-of-pocket expenses can be alleviated with Medigap policies, designed specifically to cover such deductibles.

Optional Medicare Parts: The Premium-Paid Policies

In addition to the tax-funded Medicare Part A, there are optional or supplemental policies within the Medicare system. These, too, are partially subsidized by taxpayer contributions but require regular premiums to maintain. Despite this cost, these policies offer significant savings compared to similar coverage in the absence of Medicare.

While the Medicare system's financial structure may seem complex, its premise remains straightforward. It is a system primarily funded by the working populace and designed to alleviate the financial burden of medical expenses for retirees, ensuring they can age with dignity and care. It is a testament to the idea that healthcare should not be a luxury but a right, especially for those in the twilight of their lives.

Taxes pay for the entirety of Medicare part A.

For the optional or supplemental policies which fall under the Medicare moniker, a regular premium may be due, but it’s still better than what premiums would look like if there were no Medicare. The Social Security Administration (website—here), which is funded by taxes deducted from your paycheck under FICA, or as part of the “self-employment tax,” administers both Social Security and Medicare.

As with Social Security, the idea is that each person will pay into their own future benefit pool through mandatory taxes, but in practice it looks more like healthy, working people are paying for the medical expenses of older, more infirm people. Medical expenses are one of the largest costs looming on the horizon for people entering retirement, with many estimates assuming that the average retiree will pay well over $200,000 just for out-of-pocket medical expenses as they grow older.

As of 2016, 1.45% of your income goes towards Medicare, unless you earn a high income, which subjects you to the 0.9% additional surtax. Baby boomers are entering retirement more and more, so that the over 80 population is the fastest-growing population segment, and the government is interested in protecting the finances of this large population group.

Part A does not have premiums for someone has work about 10 years in their life and paid into FICA. If the person has not paid into the system already, he or she can get a Medicare policy by paying a premium of $413 a month, as of 2016. There is a deductible which must be met in either case, of $1,316 for each benefit period (hospitalization), but so-called Medigap policies can cover the deductible.

Should I buy a Medigap policy?
How much will health insurance cost in retirement?

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