What Medicare Surplus?

Volume VII, Number 2 March 22, 2001

The White House decision to jettison trust-fund accounting in its budgetary treatment of Medicare is understandably causing controversy. Within the trust-fund framework, Medicare is running a large surplus.  Within the cash accounting framework adopted in the White House budget, Medicare is deep in deficit.

The Concord Coalition supports this change because it has always believed that cash accounting provides a more honest measure of Medicare's fiscal burden.* In recent years, the improvement in Medicare's trust-fund balance has persuaded many that the program will be self-financing for decades to come.  The White House correctly shows that Medicare will require a massive general revenue subsidy this year and every year.

However, Concord strongly disagrees with the inference the White House draws--that if Medicare isn't running a surplus there is more room for tax cuts.  If anything, just the opposite is true: The bigger Medicare's fiscal burden, the more compelling the case is for saving projected budget surpluses and the less room there is for either tax cuts or spending hikes.

An Accounting Fiction

Trust-fund accounting obscures the fiscal bottom line by counting prior-year surpluses, together with the interest-earned thereon, as genuine savings. In reality, these “assets” are simply claims on future taxpayers.  According to the White House, Medicare will run a trust-fund surplus of $526 billion over the next ten years. Excluding interest, its cash surplus of earmarked tax revenue over outlays will be just $277 billion.

These figures, moreover, only refer to Hospital Insurance (HI) or Medicare Part A, which brings us to a second problem. Trust-fund accounting lets leaders ignore Supplementary Medical Insurance (SMI), Medicare's other half. The SMI or Part B trust fund is always “solvent” since general revenues plug any gap between beneficiary premiums and outlays. Solvency, however, is not the same as sustainability. The White House projects that SMI's general revenue subsidy will total $1,171 billion over the next ten years. Subtracting this from HI's cash surplus yields a combined deficit of $894 billion.

Critics object to combining HI and SMI.  But why, when they pay benefits to the same people for the same general purpose?  Old-Age and Survivors Insurance and Disability Insurance, which have much less in common, are routinely totaled up and called “Social Security.”  The critics are right that SMI was never designed to be self-financing.  But that is precisely the point.  Its general revenue subsidy gives Medicare a large, growing, and permanent claim on the rest of the budget.

Some defenders of trust-fund accounting acknowledge that Medicare's surpluses may be a fiction, but argue that they provide a useful justification for saving budget surpluses.  Let's be clear: The Concord Coalition favors saving a share of budget surpluses at least equal to Social Security's and Medicare's trust-fund surpluses.  However, the economic case for doing so--boosting national savings in advance of the age wave--has nothing to do with trust-fund accounting.   In fact, putting too much emphasis on positive trust-fund balances, by making the programs seem more affordable, may actually undercut the case for savings.

An Anachronistic Distinction

Trust-fund accounting is a major obstacle to Medicare reform.    It papers over the program's cash deficits. And it perpetuates an anachronistic distinction between hospital care and physician care.  Most health policy experts, liberal and conservative, agree that Medicare needs to be modernized by turning it into a single comprehensive and flexible insurance package. This means erasing the old distinction between HI and SMI.

The White House accounting change is a first step in this direction. Unfortunately, both sides have confused the issue by mixing it up with the entirely separate question of whether to save or spend budget surpluses.

* See Facing Facts, issues I:8 (September 27, 1995); II:6 (June 10, 1996); and VI: 6 (May 30, 2000).