FACING FACTS The Truth about Entitlements and the Budget A Fax Alert from The Concord Coalition FAX ALERT ( Number 9, October 12, 1995) IS THE GOP'S TRUST-FUND GAMBIT GOING AWRY? With their new proposals to put Medicare savings in "lockboxes," Republicans - against the advice of their brightest staff - are pushing the budget debate into fantasy land. Their original wrong turn was the decision to justify Medicare cuts solely on the basis of trust-fund solvency. The further they go down this path, the harder it will be to bring the debate back to where it belongs: the issue of overall budget balance. A Clever Stratagem It all began with the irreconcilable goals announced in the GOP's Contract with America: balance the budget while at the same time enacting large tax cuts and pushing many large programs, most notably Social Security, off the table. Inevitably, a disproportionate share of the budget-cutting burden fell on Medicare. By the time the budget resolution rolled around, it dawned on the Republicans that they were going to catch hell for singling out such a popular program for so much savings. It was then that the GOP leadership executed its trust-fund gambit. The trick was to say that the purpose of cutting Medicare wasn't really to balance the budget at all. It was to "save" the Medicare trust fund, which, according to its Trustees, faces near-term bankruptcy and colossal long-term deficits. At first, this seemed like a clever idea. But then the stratagem began to unravel. For one thing, it smacked of expediency. Medicare's trust-fund troubles, after all, were hardly hot news. For another, as Democrats were eager to point out, the solvency issue only pertained to the Hospital Insurance (HI) trust fund. The gambit thus failed to justify the Republicans' proposed savings in Medicare's Supplementary Medical Insurance (SMI) program. At this point, the Republicans might have come clean with the public and steered the debate back to the real issue: balancing the budget. After all, SMI is growing even faster than HI - and the only reason its trust fund does not face imminent bankruptcy is because accounting conventions assume that general revenues will plug any funding gap, no matter how large. Instead, Republicans keep pushing their gambit toward a ludicrous conclusion. The Senate would reallocate much of the proposed SMI savings to the HI trust fund. The House would create yet another trust fund which would be credited with all of the SMI savings. ...But an Unwinnable End Game Both transactions are cynically devoid of economic meaning. By transferring Treasury IOUs to the HI trust fund, the Senate would indeed improve HI's actuarial balance. But it would do so through a paper transaction entirely internal to government. When HI's Trustees redeem the IOUs, Treasury will have to raise taxes or borrow from the public to honor them. The House proposal doesn't even do this much. It merely appropriates SMI savings into a special Treasury account where -- like savings credited to the President's much-ridiculed 1993 Deficit Reduction Fund -- the money will promptly vanish. In truth, Congress can strengthen the HI trust fund any time at the stroke of a pen. It did so in 1993 by crediting it with a new tier of Social Security benefit taxes (which it now proposes to repeal). If Congress also wants to credit the fund with unrelated SMI savings, fine. But don't stop there. Why not throw in the GOP savings in farm aid and AFDC? Or why not go even further and have Treasury write a check for several trillion dollars to the HI trust fund so we won't have to worry about it again for the next half century? This reduction ad absurdum unmasks the charade of trust-fund accounting. Because all federal revenues are fungible, the balance of any particular trust fund is economically irrelevant. What matters is the net difference between all federal taxing and all federal spending -- in other words, the consolidated budget deficit. Which brings us back again to where we all started: balancing the budget. Yes, large cuts in Medicare are needed to accomplish this goal. But the issue should be argued on its own merits and in the context of other spending and tax proposals. The Republicans' Medicare lockbox only makes them look ridiculous. It won't fool the public for long and it won't change the bottom line.
FACING FACTS AUTHORS: Neil Howe and Richard Jackson CONCORD COALITION EXECUTIVE DIRECTOR: Martha Phillips