The Dog That Didn't Bark

Volume IX, Number 5 July 7, 2003

Amid all the congressional debate and media coverage, it's amazing that almost no one has stopped to ask how the prescription drug benefit being rushed into law will affect the solvency of the Medicare trust fund.

The answer is that it will have no effect at all--and that nonnews is big news indeed. Without the drug benefit, the Trustees project that Medicare will be solvent until 2026.  With the benefit, which is due to cost $100 billion a year and rising within a decade, Medicare will still be solvent until 2026.

Trust-fund accounting has always been an imperfect measure of Medicare's impact on the federal budget.  Clearly, it has now become irrelevant.

That's a problem, since, imperfect as it is, trust-fund accounting is the only backstop the budget has against runaway entitlement spending.  Traditional trust-fund rules at least attempt to constrain spending to an existing earmarked revenue source.  The prescription drug trust fund will enjoy an open-ended claim on general revenue, which is another way of saying that, for the foreseeable future, it will be deficit-financed. 

A Time-Honored Tradition

Trust-fund accounting is a time-honored budget tradition dating back to the founding of the nation and beyond.  Over the years, it has been applied to everything from the post office and highway construction to civil service pensions and Social Security.

Yes, trust-fund accounting has many pitfalls.  Federal trust funds do not engage in genuine savings.  By balkanizing government, they also favor special interests over the general interest. Still, trust-fund accounting has one redeeming virtue--namely, it encourages Congress to take long-term costs into account.  Over the years, the looming insolvency of a trust fund has often led Congress to cut benefits or raise taxes, the most famous case being the 1983 Social Security Reform Act.

Medicare has always been part of this trust-fund tradition. When it established Medicare, Congress set up its Hospital Insurance or HI program as a payroll-tax financed trust fund.  It made an exception, however, for Supplementary Medical Insurance or SMI, in part because of the AMA's opposition to payroll-tax financed benefits, which it considered tantamount to socialized medicine. SMI was thus financed by a combination of beneficiary premiums and general revenues.

At the time, few in Congress considered this a big deal, since SMI was a relatively small component of Medicare.  But once the door was opened, it couldn't be shut again.  Over time, Congress let SMI premiums decline as a share of program outlays.  It opened the HI trust fund to general revenue by crediting it with Social Security benefit taxes. And it shifted billions of dollars of expenditures from HI to SMI, thus improving Medicare's “solvency” without reducing its cost.

Some favored general revenue financing because it was more progressive than payroll-tax financing.  Others simply chafed at any rule that might force them to cut benefits.  Meanwhile, as the pitfalls of trust-fund accounting became better known, new generations of Americans forgot why we have trust funds at all.  

Now, for the first time in history, Congress is debating a major new senior entitlement without so much as a nod to traditional trust-fund constraints.  In both the Senate and House bills, the drug benefit would be financed through special accounts that are nominally trust funds, but in which general revenue subsidies will automatically cover whatever the cost turns out to be.

A Perilous Step

Congress is taking a perilous step in dismantling the trust-fund backstop.  The drug benefit's open-ended claim on general revenue will make cost control much more difficult. Yet paradoxically, by undermining Medicare's status as contributory social insurance, it may also reduce popular support for the program.

 The Concord Coalition urges Congress to reconsider its trust-fund end run.  While trust-fund accounting has many pitfalls, it's irresponsible to jettison it without putting a new cost control mechanism in its place