September 2, 2014

Bookkeeping Sleights of Hand Conceal Budgetary Reality

It’s getting to be that time again when the Social Security and Medicare Trustees release their annual report on the programs’ 75-year outlook. This report is the source of valuable information, but it often causes confusion because of the different conclusions that can be drawn depending upon whether one looks at trust fund balances, which are positive, or at cash flows, which are negative.
 
Is the glass half-full or half-empty?
 
The Concord Coalition has always stressed the importance of cash flows over trust fund balances. As the Congressional Budget Office (CBO) has observed, government trust funds “have important legal meaning but little economic or budgetary meaning.”1
 
This is because trust fund “assets” are nothing more than promises from the government to pay itself a lot of money in the future regardless of whether any resources have been saved for that purpose. Trust fund balances are thus easily manipulated to increase their claims on general revenues.
 
Two recent examples demonstrate why trust fund balances should be taken with a grain of salt. One involves a grant of spending authority (new bonds) to the Social Security trust funds unsupported by any new income. The other involves cutting spending from Medicare and raising Medicare payroll taxes to pay for a portion of non-Medicare health care spending under the Affordable Care Act (ACA), while simultaneously extending the life of the Medicare Hospital Insurance (HI) trust fund.
 
In both cases, the trust funds receive new “assets” (claims on general revenues) from which to pay future benefits. Yet in neither case has anything been done to improve the government’s overall ability to pay the future benefits to be covered by these assets. The transactions are a bookkeeping sleight of hand designed to accomplish policy goals without acknowledging the budgetary trade-offs.
 
In the case of Social Security, Congress and the President decided to cut the payroll tax to help stimulate the economy. But because they did not want to be accused of “raiding” the Social Security trust funds, they decreed that the trust funds would still be credited with the same amount of revenues and interest income as if the payroll tax had not been cut.
 
While it may make sense to cut the payroll tax as a matter of economic policy, it makes no sense to credit phantom income (along with phantom interest on that income) to the trust funds. Doing so undermines the concept that Social Security is “self-financing” through dedicated employer and employee taxes. This accounting maneuver shifted hundreds of billions of obligations to general revenues and, because general revenues are already insufficient to pay for other government programs, amounted to backdoor deficit-financing of Social Security.
 
Even without the payroll tax cut, Social Security is already paying out more than it is taking in, meaning that it is already becoming more reliant on general revenues to pay benefits. Granting the program additional general revenues does nothing to make it more affordable. It merely masks the rising cost while allowing politicians to claim that they are simultaneously “cutting taxes” and “protecting” Social Security.
 
If this makes sense, why stop? For politicians who don’t want to be accused of “raising taxes” or “raiding” the trust funds, general revenue credits may come to be seen as a great way out.
 
A somewhat different, but equally misleading, practice is happening with Medicare. Genuine Medicare cuts and tax increases were enacted as part of the ACA to offset new spending. Under conventional trust fund scoring, these items also improve the outlook for the Medicare HI trust fund, assuming they are allowed to fully take effect. However, they don’t actually change the ability for the treasury to pay for Medicare benefits because the money freed up by the Medicare cuts flows right out the door to be used for other health care spending.

As explained by CBO Director Douglas Elmendorf in a letter to Sen. Jeff Sessions as the ACA approached passage:

The reductions in projected Part A outlays and increases in projected HI revenues ...would significantly raise balances in the HI trust fund and might suggest that significant additional resources ...had been set aside to pay for future Medicare benefits. However, only the additional savings by the government as a whole truly increase the government’s ability to pay for future Medicare benefits or other programs, and those would be a much smaller.... Unified budget accounting shows that the majority of the HI trust fund savings ... would be used to pay for other spending and therefore would not enhance the ability of the government to pay for future Medicare benefits (emphasis added).2

Both issues, the Social Security trust fund credits and the “double counting” of Medicare savings, are not newly discovered. They just reaffirm the need for policymakers to focus on what matters to the budget and the economy, not on internal governmental bookkeeping. When the Trustees’ Report comes out, analysts should look beyond the trust fund balances, which often receive the most attention, and focus instead on the real world consequences of making good on scheduled benefit payments.



1 Congressional Budget Office, letter to the Honorable Jeff Sessions, January 22, 2010, p.3.
2 Ibid.