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The Medicare Trustees’ Report and the $8.1 Trillion Double Count

10:10 AM, Apr 24, 2012 • By JAMES C. CAPRETTA
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The Medicare HI trust fund is supposed to operate like the Social Security trust funds. Its only “income” is from tax revenue, mainly from payroll taxes (the other Medicare trust fund, for physician services, drugs, and other outpatient care, is financed heavily by the general fund of the Treasury and is therefore very different in character from the HI fund). Since enactment in 1965, the political consensus has been that the HI program should operate within a solvent trust fund. That is, whatever benefits are paid by HI over the years should be covered in full by taxes dedicated solely to the HI program. That’s the whole point of the HI trust fund convention. The trust fund doesn’t hold real economic assets in it. It’s an accounting device. But the purpose of the convention is important nonetheless. It is supposed to ensure the program is self-financing over time.

Of course, that’s the same logic guiding the operation of the Social Security trust funds. Indeed, to understand the Medicare double count in Obamacare, it’s useful to think about an analogous Social Security scenario.

As of today, the trustees project that Social Security will have an $8.6 trillion unfunded liability over the next seventy-five years. That is, on a present-value basis, tax receipts are expected to come in $8.6 trillion short of promised benefits over the long-range projection period. That shortfall could be covered with a simple fix: an increase in the Social Security payroll tax from about 12.4 percent today (not counting the 2011-12 payroll tax cut) to about 15 percent in the years ahead (note: I wouldn’t recommend this!). That tax hike would solve the shortfall problem and ensure benefits could be paid in full well into the future.

Now let’s suppose Congress took up a piece of legislation to do just that. Over the next decade, such a Social Security tax hike would produce a large amount of revenue, probably on the order of about $125 billion annually. That would be more than enough money to simultaneously establish a large, universal entitlement to subsidized college education. Every person graduating from high school could get a huge break on their tuition, paid for by the government. In fact, if the cost of the college program were kept to $100 billion annually, the legislation would appear to reduce the federal budget deficit by perhaps $25 billion every year.

But imagine the outcry if Congress actually tried to pass such legislation? The public would be outraged at the thought that Congress was trying to use Social Security tax revenue to pay for spending outside of the Social Security program. And they would be right to be outraged, because it would constitute a double-counting of the same money. That $125 billion coming into Social Security would be authorizing and paying for future benefit payments from the Social Security program. If the same money were used to also stand up an unrelated $100 billion per year entitlement, the law would be authorizing two new spending commitments with one source of revenue. The budget would be far worse off compared to the situation in which a Social Security fix were enacted on a standalone basis.

This is one important reason why Social Security changes are not counted on the “pay-as-you-go” scorecard, the ledger Congress uses to ensure that legislation which cuts taxes or increases entitlement spending includes offsets to prevent deficit increases. If Social Security changes were included on paygo, then a payroll tax hike could be used to pay for something else, like a universal college entitlement.

Unfortunately, unlike Social Security, the Medicare HI trust fund is counted on paygo, which is why Congress was able to double count Obamacare’s Medicare HI tax hikes and spending cuts. The proceeds of those changes are recorded both within the HI trust fund (thus effectively authorizing future entitlement spending) and on the paygo scorecard, thus authorizing Obamacare’s Medicaid entitlement expansion and new premium credits in the health exchanges.

The result is a very deceptive shift in federal finances. On paper, it would appear that Obamacare has reduced substantially the government’s long-term unfunded liabilities. In 2009, before Obamacare, the Medicare trustees’ report showed the HI trust fund had an unfunded liability of $13.4 trillion over the next seventy-five years. In this year’s report, that unfunded liability is down to just $5.3 trillion. In rough terms, then, Obamacare would seem to have reduced the HI trust fund’s unfunded liability by about $8.1 trillion.

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