Facing Facts Alert 18

Volume II (Number 6. June 10, 1996

Facing Facts Alert 18

The Truth about Entitlements and the Budget
A Fax Alert from The Concord Coalition
Volume II (Number 6.  June 10, 1996)


The new Medicare Trustees' report once again brings home how out of
kilter the whole system is.  Rather than try to solve the problem, the
administration would hide it by reallocating Medicare expenditures from
the Hospital Insurance (HI) trust fund, which by law must be solvent to
pay benefits, to Medicare's Supplementary Medical Insurance (SMI)
program, where general revenues will automatically plug any funding
gap, no matter how large.  There, presumably, the spending will vanish
in the sea of other budgetary red ink.

The Republicans are to be commended for their greater honesty: Their
proposed savings would actually  come from restraining spending. Still,
not even the GOP dares to acknowledge the full magnitude of Medicare's
funding shortfall and come clean with the public about how much must be
saved to "save" the program.

The Real Bottom Line

First of all, the GOP plan would merely extend the solvency of the HI
trust fund for about five years beyond the 2001 bankruptcy date
announced by Medicare's Trustees.  In the context of a program that
makes benefit promises spanning a lifetime, and whose official
definition of solvency is trust-fund balance over 75 years, this
improvement seems underwhelming.  Moreover, even over the near-term,
the GOP plan -- though more responsible than the administration plan --
falls far short of the HI savings that are required to keep this
"self-financing" program from adding to the federal deficit. As we have
argued in other alerts, the only economically sensible way to look at
Medicare is to jettison the metaphysics of trust-fund accounting, which
allows politicians to count the system's paper assets as genuine
savings, and to look instead at Medicare's operating balance -- that
is, the annual difference between its outlays and earmarked tax

Looked at on a cash basis, HI is already running an  annual deficit of
$17 billion, a shortfall that will rise to $41 billion by 2000, the
last year the program is officially projected to be solvent. Over the
next six years, HI's cash deficits will total a cumulative $230
billion. This figure represents the HI savings that Congress must find
(either by cutting benefits or by raising taxes) to keep HI from adding
to the overall federal deficit.

Logically, we would also want to include SMI in this calculation, since
it too affects the federal budget balance.  Remember: SMI's earmarked
revenues (which consist of beneficiary premiums) now amount to only
one-quarter of SMI costs.  The remainder is filled in by a direct
Treasury subsidy.  A sensible test of the financial stability of SMI is
whether its Treasury subsidy will remain constant as a share of GDP.
This test shows that, under current law, SMI will have a cumulative
cash shortfall of $100 billion over the next six years.

All told, Medicare's projected cash shortfall is thus $330 billion --
twice what the GOP would save in HI and SMI and nearly three times what
the administration would save. These figures, of course, refer to the
budget debate's myopic six-year time horizon. They say nothing about
the vast sums we would need to save to stabilize Medicare when the Baby
Boom retires.  To get an idea of just how large these sums are,
consider that even the "draconian" GOP plan would still leave Medicare
on track to double as a share of GDP by 2025.

Trust-Fund End Game

Asked whether Medicare's uncertain fiscal outlook means that
beneficiaries might face fewer services or higher costs, HHS Secretary
Donna Shalala says "Absolutely not."  Perhaps the administration is on
to something.  By shifting $55 billion in home health care spending out
of HI, it would extend the solvency of the HI trust fund by roughly as
many years as the GOP would while cutting roughly 40 percent less in HI

Why not push this reasoning to its logical conclusion?  Why not shift
enough spending out of HI to balance its trust fund indefinitely?
After all, "saving Medicare for generations to come" makes a better
sound bite than saving it for the next ten years -- especially if you
can do so without revealing how much future generations will have to
pay for today's courageous deed.


The Concord Coalition web pages were designed by Marla Parker and Krista Reymann. These pages are now maintained by Craig Cheslog. . Last updated: 24 Apr 1997