Medicare bill OKs tax-free accounts
Published: Monday, December 1, 2003 at 6:01 a.m.
Last Modified: Sunday, November 30, 2003 at 10:56 p.m.
WASHINGTON - Sen. Wayne Allard of Colorado didn't want to create a new prescription drug entitlement under Medicare.
But the conservative Republican said he voted for the Medicare bill because it included something else: a tax shelter.
Younger, healthier and wealthier Americans had reason to thank Congress as the bill headed to President Bush's desk just before Thanksgiving. The Medicare bill will allow workers to invest tax free in health savings accounts throughout their working lives, watch the money accumulate and then spend it on health care - again, tax free.
"At least it's a step in the right direction, but I think we're going to have to reform some of our entitlement programs," Allard said after the Senate vote Tuesday. ``They're just going to bankrupt the country, so we have to do something about it and this is the first step."
Will cost billions
The accounts will cost the federal treasury an estimated $6.7 billion in lost tax revenue over 10 years, which opponents say could have helped pay for the new prescription drug coverage for seniors. The bill's overall cost is just under $400 billion.
Democrats and other opponents of the accounts say these are federal tax shelters that only rich people can afford and will threaten health insurance coverage for everyone else. The plan greatly expands on a previous type of tax-free health savings account for small businesses and the self-employed, few of whom took advantage of them because of restrictions that will be eased.
Next year, workers who can afford to risk a high deductible insurance plan and have money to invest will be able to tap Wall Street in a new way. Some Republicans say there's another advantage. The accounts could energize support for a similar idea to allow workers to invest part of their Social Security savings in private accounts.
``We've now set the stage for how to reform Social Security in 2005,'' said Rep. Adam Putnam, a Florida Republican who said health savings accounts were vital to his support on Medicare.
Workers with qualified insurance policies - with deductibles of at least $1,000 for a single person and $2,000 for a family - will be allowed to invest tax free in health savings accounts. Employers could also deduct contributions to an individual's account. Congressional negotiators who wrote the bill reported that the maximum tax-free investment would be $2,600 a year for a single person and $5,150 for a family. Next year, people from 55 to 65 will be able to invest an extra $500 on top of those limits, a catch-up allowance that will increase annually to $1,000 in 2009. Medicare-eligible seniors cannot invest.
The money can be spent anytime and won't be taxed if it is used to pay for insurance premiums, drugs, long-term care and other medical services but would be taxed with a 10 percent penalty if used for something else. Foes say these accounts are unprecedented because they allow money to go untaxed at both ends. For example, money placed in popular 401(k) plans is taxed when it is withdrawn.
``Medical savings accounts are important part of reform,'' Bush said in Las Vegas after the Senate vote. ``Medical savings accounts trust the consumers, provides incentives for people to make wise choices and helps to maintain the doctor-patient relationship.''
Many Democrats are reluctant to draw direct parallels between health savings accounts and private Social Security accounts because the mechanisms and consequences are different, but they say both share the GOP emphasis on private investment.
``It's part of the wave of dismantlement of elderly programs,'' said Sen. Bob Graham, D-Fla., who voted against the Medicare bill and who opposes private accounts in Social Security.``Take down Medicare today, then that makes Social Security that much more vulnerable.''
Republicans sidelined their plan for individual Social Security accounts while they pursued Medicare reform and other priorities. Democrats argue the accounts would drain the system of needed funds and risk retirement savings on the stock market. Bush, however, is developing a 2004 campaign theme of building an ``ownership society'' that includes control over Social Security accounts, homeownership and other market-driven plans.
``It forebodes that we're all on our own,'' said Barbara Kennelly, president of the National Committee to Preserve Social Security and Medicare. ``You better be young, you better be wealthy and you better be healthy.''
Republicans say the health accounts give workers more options for preparing for retirement, a fundamental justification for Social Security accounts.
``You have now introduced choice and options to your retirement years, and that's just critical,'' Putnam said.
Critics argue, however, the health accounts could drive up insurance costs for people who can't afford to invest. That's because workers are only allowed to invest in the accounts if they choose an insurance plan with a high deductible.
They say people who have the money and are willing to bet they won't need much medical care will leave traditional insurance to open the tax-free accounts. The problem is that insurers base their rates on the risk that their policyholders will require certain levels of care. Critics warn that if significant numbers opt out of traditional, lower deductible policies and leave mostly older, sicker and poorer people in those risk pools, aggregate costs for insurers could rise and lead to premium hikes.
AARP supported the Medicare bill but officials said they don't like the health savings accounts.
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