Health Care "Reform": The Death Knell for the Medicare and Social Security Trust Funds?
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If President Obama signs health care legislation resembling either the Senate or House bills, one little-noted consequence is virtually certain: it will deal a mortal blow to the credibility of Social Security and Medicare Trust Fund financing.
Should such legislation pass, no serious person on either side of the aisle can reasonably attach legitimacy to Trust Fund accounting going forward. What remains to be seen is the extent of the ultimate damage done to the Social Security and Medicare programs as historically operated.
To be sure, not everyone takes Trust Fund financing seriously now. Many analysts believe that Trust Fund accounting has already become too corrupted to remain budgetarily meaningful. Still, it is quite possible that historians will look back on this political moment as the event that signaled the ultimate demise of the Trust Fund concept.
Why? The short answer is that the health care bills purposely exploit Trust Fund financing. The Senate bill, in particular, reduces Medicare spending by more than $400 billion over ten years, while simultaneously increasing the Medicare payroll tax. While the scorekeeping books will show these measures as extending Medicare solvency, the full amount of the savings will be spent elsewhere – by the very same bill.
To fully appreciate why this matters, it’s necessary to quickly review the Trust Funds’ long history, and the debates surrounding them.
A little background: For several decades, Social Security – and later Medicare – has theoretically been financed through a separate (and dedicated) Trust Fund. This was done to segregate the programs from the general treasury (which is used for most other federal programs) and to provide an explicit link between the payroll taxes and the programs they were designed to fund.
This Trust Fund concept has been used to protect Social Security and Medicare from competition for resources within the federal budget. At the same time, the Trust Funds were also supposed to serve as a form of fiscal discipline upon the programs themselves – by delineating and limiting the total amounts they were permitted to spend.
The fundamental principle underlying the Trust Funds is that each program’s spending must be generated by its own dedicated revenue stream. In the cases of Social Security and Medicare Part A, this is accomplished by a payroll tax upon wages. The programs then could not spend any more than the dedicated revenue stream provided.
What has happened? Over the years, a number of developments have corrupted the integrity of the Trust Fund concept. For example, a Trust Fund for Medicare Part B was established, even though the vast majority of its revenue comes from an open tap on the general budget (effectively ignoring the dedicated funding stream concept). A similar method was later employed for Medicare Part D. Each of these programs is essentially deemed to be solvent by accounting definition, even though neither program generates anything close to the budgetary resources that it appears to command.
The 1983 Social Security reforms dealt another blow to the integrity of Trust Fund financing. Those reforms generated substantial annual Social Security surpluses – $2.5 trillion altogether – that persisted until earlier this year. These surplus revenues were “borrowed” by the general treasury and used in effect to finance other federal spending, continuing the deterioration of holding sacred the link between a funding stream and the program it is designed to fund.
The decades of Social Security surpluses provoked a fierce debate among economic policy analysts. For many years after the 1983 reforms, CBO, GAO, and even the Clinton Administration’s OMB somberly explained in various publications that the Social Security Trust Fund constituted merely the permission to spend money rather than a true accumulation of resources, since nothing was (literally) being saved.
The experience of dissipating the Social Security surpluses thinned the ranks of Trust Fund defenders. Their rear guard nevertheless became more vociferous, experimenting with novel arguments in defense of Trust Fund accounting – and a variety of assertions were made. For instance, it was asserted that the redemption of bonds in the Trust Fund would simply square a debt owed by the rich to the poor; it was also asserted that the Trust Fund buildup and drawdown was the premeditated 1983 plan (both of these claims are incorrect); and it was asserted that the Social Security surpluses had been used by the federal government to build savings indirectly, borrowing less than it otherwise would have (also untrue).
The 1983 reforms weren’t the only relaxation of the integrity of Trust Fund financing in recent years. In the late 1990s, the Clinton Administration proposed extending the Trust Fund on paper by double-crediting the program’s surpluses. More recently, the Obama Administration portrayed their “Making Work Pay” provision as relief from payroll taxes while crediting those same payroll taxes in full to the Social Security Trust Fund.
Still, these instances of creative accounting were poorly understood by the press and public, and the larger Trust Fund debate was primarily a debate between eggheads – so there has been no public resolution of the controversy. Many private citizens understood implicitly that Trust Fund monies were being persistently spent, but it was always possible to find a partisan advocate to make the opposite case.
No more-or, at least, not if health reform passes.
The proponents of these health care bills have made it all too simple: they’re going to raise Medicare taxes, and cut Medicare spending – and they’re going to whisk that money right out the door. There is no pretense otherwise. The government’s books will show an illusory extension of Medicare solvency, even as the money is transparently spent on other things, all in the same bill.
The undermining of the Trust Funds is so blatant that the non-partisan CBO and CMS Actuary have been unwilling to remain silent about it. The CMS Actuary blew the whistle first, writing that “the improved part A financing [resulting from the Senate health bill] cannot be simultaneously used to finance other Federal outlays (such as the coverage expansions under the PPACA) and to extend the trust fund, despite the appearance of this result from the respective accounting conventions.”
CBO then followed suit, explaining that “savings to the HI trust fund under the PPACA would be received by the government only once, so they cannot be set aside to pay for future Medicare spending and, at the same time, pay for current spending on other parts of the legislation or on other programs.”
Translation: Medicare solvency is not actually being extended in this bill.
No one can say what the ultimate result of the health care accounting games will be. Congress has played accounting tricks with the Trust Funds before. What is different this time, however, is that the ideas behind transparent and functional Trust Funds have been fully, and perhaps finally, obliterated. This is a lesson the political system should – and almost surely will – not soon forget.
Once there has been a willful abandonment of the appearance of legitimacy in Trust Fund accounting, then the barrier between Social Security/Medicare and the rest of the federal budget is practically dissolved. Social Security and Medicare can no longer be shielded from budget cuts with the defense that their Trust Funds are still in the black; everyone will know this is meaningless.
Perhaps the greatest irony of all this is that legislation to obliterate the appearance of Trust Fund solvency has been supported by the AARP, an avid defender of Medicare and Social Security. When this destruction of the Trust Fund barrier inevitably results in future reductions in Social Security and Medicare benefits, it will be interesting to see how AARP defends their collaboration in this decisive ploy.