Facing Facts Alert 8

Number 8, September 27, 1995

Facing Facts Alert 8

The Truth about Entitlements and the Budget
A Fax Alert from The Concord Coalition
FAX ALERT ( Number 8, September 27, 1995)


Some Democrats are saying that only $89 billion in savings are needed to "save"
Medicare.  Not so.  This number vastly understates Medicare's projected revenue
shortfall, even over the budget debate's seven-year time frame, and has nothing
at all to do with the staggering savings that would be required to keep the
Medicare trust funds solvent on an ongoing basis.

More Trust-Fund Follies

First, the $89 billion figure refers only to Medicare Hospital Insurance (HI).
It ignores Supplementary Medical Insurance (SMI), the part of Medicare which
pays for doctor bills, even though SMI is growing faster than HI and even though
the Clinton administration's own budget plan targets SMI for $35 billion in

Second, even for HI, $89 billion doesn't come close to ensuring long-term
solvency. According to the Health Care Financing Administration, these savings
would merely postpone the trust fund's bankruptcy by four years, from 2002 to
2006.  Balancing the trust fund over 75 years, the legal definition of HI
solvency, would require savings of 3.5 percent of payroll next year and every
year thereafter.  This is ten times more than the administration would save
annually in HI during the next seven years, and indeed, over five times more than
the congressional Republicans would save.

Numbers like these are causing some stalwart defenders of Medicare to steer
clear of rhetoric about "preserving" the program's trust funds, and hence the
need to account for Medicare's yawning long-term deficits. Rep. Sam Gibbons
recently insisted: "Medicare is a pay-as-you-go program.  It is not Social

Gibbons' novel distinction has no basis in law.  Like Social Security, HI comes
with a "self-financing" trust fund; and like Social Security, the official
measure of that trust fund's solvency is a 75-year actuarial balance.

Yet if Rep. Gibbons is wrong about the law, he may be right about the economics
of both Medicare and Social Security.  As we argued in an August 17 fax alert,
the only economically sensible way to look at these programs is to regard them
as pay-as-you-go spending and thus to focus on their impact on the consolidated
federal budget deficit. This means jettisoning the whole metaphysics of
trust-fund accounting and looking instead at HI's operating balance - that is, the
annual difference between its outlays and earmarked tax revenues.
Unfortunately, this "cash basis" perspective does not really improve Medicare's
financial outlook.

The Cash Bottom Line

Looked at on a cash basis, even the near-term outlook for Medicare is grave.
While the HI trust fund will be "solvent" until 2002, it is already running a
cash deficit.  Over the next seven years, this cash deficit is projected to grow
by a cumulative $143 billion.*  This figure - not $89 billion - 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.  Entirely eliminating the
HI cash deficit by 2002 would require a still larger saving of $167 billion.

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 Part B premiums) amount to only about 30 percent 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 $186 billion over the next seven years.

Let's cut to the bottom line.  Looking at HI on a cash basis, we would need $143
billion in savings over the next seven years to keep this "self-financing"
program from adding to the consolidated budget deficit.  Looking at SMI and
setting the rather modest goal that its Treasury subsidy grow no faster than the
economy, we would need another $186 billion in savings.  That comes to $329
billion, a fifth more than what Congress calls for ($270 billion) and
two-and-one-half times what the administration calls for ($124 billion).

*All  projections cited here assume the CBO baseline or, when necessary, the
HCFA baseline (which is known to be more optimistic).


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