If two couples make almost the same amount of money, should one of them be charged $2,000 more in Medicare Part B premiums? Logically, no, but to the federal government, the answer is sometimes “yes.” This problem will get worse in 2016, and much worse by 2018.
Under federal law, an elderly couple can be charged thousands extra annually for Medicare premiums if their income goes up by just a few dollars (which can occur because they saved their money, and thus have more savings account interest or investment income). That’s because Medicare premiums suddenly jump by big amounts at certain income levels, rather than rising gradually the way your taxes do when your income rises.
Now, these arbitrary income cliffs will get even worse due to a quirk in federal law. As the Fiscal Times notes in “Millions Facing a Hefty Increase in Medicare Premiums in 2016,”
Raising premiums massively when income hits a specific dollar amount encourages people near that amount to work (and earn) less to avoid the increased premiums. It also encourages them to hide their income to stay just below the income cliff, and to come up with complicated and time-consuming schemes to shift taxable income from one year to the next, in order to stay just below an arbitrary income level that will raise their premiums.
When the government imposes big jumps in premiums for small increases in income, that harms the economy by creating disincentives to work. For example, income cliffs for health insurance tax credits that were carelessly included in the 2010 healthcare law are one reason that Obamacare may end up shrinking the nation’s labor force by 2.3 million people over the next decade.