May 17, 2001 | Backgrounder on Health Care
Claim #1: Giving Americans significant tax relief will threaten Medicare's financing. In other words, Congress will need to raid the Medicare surplus in order to provide tax relief. This is simply not true. Nothing in the Bush tax and budget proposals requires Congress to raid the Medicare trust fund. Under the President's plan, every penny of Medicare taxes collected and premiums paid, and more, will continue to go into the Medicare program.1 The President's budget plan--after increasing government spending by $853 billion from fiscal year (FY) 2002 to FY 2011, providing $1.6 trillion in tax relief, and setting aside $2.6 trillion for Social Security and $526 billion for Medicare--still leaves a $317 billion surplus.
It requires the taxes of four workers to support each Medicare beneficiary's benefits. By 2040, enrollment will jump to an estimated 81 million, but there will be only about two workers per beneficiary. It is widely recognized that the federal entitlement program is burdened with two broad problems: how to pay for the sharp increase in demand for services when the nation's 77 million baby boomers begin to retire in 2011 and become eligible for Medicare, and how to ensure high-quality health care for the next generation of retirees in the face of exploding costs, excessive regulation, and gaps in coverage.
The entire Medicare program is financed through two trust funds, known as Part A and Part B. These trust funds have very different methods for paying out benefits and very different sources for funding those benefits:
Medicare Part A reimburses hospitals and is financed by a dedicated payroll tax of 2.9 percent. The payroll tax revenue for Medicare Part A is deposited in the Hospitalization Insurance (HI) trust fund. This trust fund is currently running an annual surplus, but the Medicare Trustees forecast that this will be depleted by 2029.4
This presentation of Medicare financing is an honest assessment of the entire program's fiscal condition.8 The President's budget plan recognizes that even though the HI trust fund is solvent today, Medicare is not solvent overall. The government must go beyond Medicare's dedicated payroll tax and beneficiary premiums and rely on huge infusions of general revenues in order to continue paying benefits. This problem will worsen significantly when the baby-boom generation begins to retire in 2011. The Concord Coalition argues in an independent analysis that the current trust fund accounting method is a major obstacle to Medicare reform because it papers over Medicare's cash deficits and perpetuates an out-of-date distinction between hospital care and physician care.9
Opponents' Views on Medicare's Financial Condition. Opponents of the President's tax and budget plans claim that he is ignoring the statutory requirement that general tax revenues be used to fund Medicare Part B spending not covered by beneficiary premiums.10 Relying on the traditional trust fund accounting method to portray Medicare's financial condition, they claim that Medicare Part A's $526 billion surplus should be set aside from the rest of the budget. They charge that the President effectively includes the surplus as part of his contingency fund in order to use it to pay for other programs.11
Implicit in their methodology is an assumption that an unlimited and ever-larger draw on the U.S. Treasury for Medicare is not a problem, regardless of how that demand for spending would affect taxpayers, Medicare beneficiaries, or funding for other government programs. This is unrealistic.
|Financing Medicare: Same Data, Different
How Medicare financing is talked about can be very confusing, as recent statements demonstrate. According to a joint report by the Senate and House Democratic Policy Committees, for example,
"The Bush Administration argues that if you combine the Part A and Part B programs, there is no real Medicare surplus-even while their own budget tables project a $526 billion surplus over ten years. This argument is deliberately misleading, and wrongly assumes that the only funding sources for the Medicare program are Part A payroll taxes and Part B premiums. It ignores the statutory requirement under the Social Security Act to use general revenue funds to finance Part B program expenses not covered by beneficiary premium contributions. Based on this logic, any government program paid for with general funds is in deficit-including defense."1
The Concord Coalition, on the other hand, has published a different analysis:
"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."2
1. Senate Democratic Policy Committee and House Democratic Policy Committee, The Medicare Trust Fund Finances the President's Bloated Tax Cut: Sacrificing the Health Security of America's Seniors, March 14, 2001.
2. Concord Coalition, "What Medicare Surplus?" Facing the Facts, March 22, 2001.
Understanding the President's Contingency
The President's budget plan includes a contingency fund of $841 billion, which includes the Medicare Part A surplus. Since his plan shows that Medicare will run a deficit of $645 billion from FY 2002 to FY 2011, it logically does not mention that the Medicare Part A surplus is part of the contingency fund. Opponents of the President's tax relief plan do not want the Medicare Part A surplus of $526 billion from FY 2002 to FY 2011 to be counted in the contingency fund.
A less confusing way to present the President's budget plan, which the House Budget Committee has used, would be to create two contingency funds--one for the Medicare Part A surplus and another for the remaining budget surplus (see Chart 1).12
Opponents of the President's proposed tax relief plan rely on the confusion surrounding Medicare's financing and the contingency fund to further their goal of limiting substantial tax relief. They are making a number of claims that regrettably scare far too may seniors and cloud the debate over Medicare and tax reforms. Each of these claims, however, can be refuted.
Claim #1: Giving Americans significant tax relief will threaten Medicare's financing. For example, a joint report of the Senate and House Democratic Policy Committees charges that the Bush Administration "has to spend the Medicare surplus in order to pay for its tax cut."13 In another report, FamiliesUSA, a Washington-based organization that campaigns for greater government control of the health care system, also charges that the Bush plan would finance one-third of the proposed tax cuts by raiding the Medicare program: "The $526 billion of additional [Medicare surplus] resources in the general fund are available to support almost one-third of the President's proposed $1.6 trillion tax cut."14
Reality: A close examination of the President's tax relief plan shows that it will not threaten Medicare's surplus. This is true whether one uses a static estimate of the tax revenue "cost" of the Bush tax plan ($1.7 trillion) or a more accurate dynamic estimate of the cost of the Bush tax plan ($1.1 trillion).15 Using a static analysis, which does not include an analysis of how changes in tax policy affect economic activity, the 10-year budget surplus would be large enough to support the President's tax relief plan without threatening Medicare.16
The Office of Management and Budget (OMB) estimates that the total surplus from FY 2002 to FY 2011 will exceed $5.6 trillion. Reducing this surplus by the amount of the President's tax relief plan, as well as his proposed spending increases for Medicare and other priorities and additional debt service requirements, still would leave a surplus of over $3.4 trillion (see Table 2). Further removing $2 trillion of the Social Security surplus used to reduce publicly held federal debt would leave a surplus of $1.4 trillion: $574 billion in Social Security, $526 billion in Medicare, and $317 billion in general revenue for the contingency fund.17 These remaining funds would have to be invested with banks and the Federal Reserve, or in some other private-sector asset, or used to reform Social Security and Medicare.
Many prominent economists believe that the static analysis used by OMB and others is outmoded because it fails to account for behavioral changes in work and savings that result from changes in tax rates. Heritage Foundation analysts therefore conducted dynamic analyses of tax policy changes to account more accurately for how such changes affect economic activity. A dynamic analysis of the President's tax plan reveals that the federal surplus, excluding the Social Security and Medicare surpluses, would be over $1.0 trillion from FY 2002 to FY 2011--not the $317 billion in the contingency fund using the static analysis.18 This amount would be more than enough to modernize and improve Medicare.
Arcane budget rules can be used to confuse and scare an uninformed public. Clarity can be brought to the discussion by taking the President's budget plan and separating the Medicare surplus from the rest of the contingency fund (see Table 2).
The assertion that President Bush's plan to give tax relief to Americans would threaten the Medicare surplus is based on outdated trust fund accounting methods and static revenue estimates that ignore economic reality. Opponents also inflate the static size of the President's tax relief plan from $1.7 trillion to $2.6 trillion in order to make their charges.19 In reality, because income tax rate reductions increase economic activity and employment, Medicare's payroll tax revenues would increase by $39 billion from FY 2002 to FY 2011.20 Moreover, broad and generous tax relief would make it even easier for many retired Americans to purchase prescription drug coverage, regardless of whether Congress moves forward with Medicare reform to include a prescription drug benefit.
Claim #2: Medicare reform with tax relief will require Congress to cut seniors' benefits. For example, the Senate and House Democratic Policy Committees recently issued a report on the Medicare trust funds and the President's "bloated tax cut" that had an inflammatory subtitle: Sacrificing the Health Security of America's Seniors.21 FamiliesUSA likewise charges that "insolvency, under the President's budget, would occur 15 years earlier than current projections, thereby impairing seniors' abilities to count on inpatient services nine years from now."22 This scares seniors into thinking that their benefits are at risk if tax relief is enacted.
Reality: No individual would lose medical services under either Medicare Part A or Part B as a result of President Bush's budget proposals. Among the President's top budget priorities is that seniors' "current guarantee of access" to their Medicare benefits be preserved. Moreover, the President is proposing to enhance that range of benefits by giving every Medicare recipient a personal choice of health plans, including the option of purchasing a plan that covers prescription drugs.23
President Bush has indicated his intention to preserve and modernize Medicare's benefits, including the addition of prescription drug coverage. Moreover, the President's budget plan presents the financial health of Medicare by looking at Part A and Part B together, which is a more realistic presentation of the program's problems and sustainability. Opponents have misrepresented both the intent and the substance of the President's reform proposals.
Too many Members of Congress have resisted reforming this troubled program to put it on sound financial footing. In addition, too many simply want to add a new drug benefit without reforming the old program. They would displace existing private-sector drug coverage and guarantee explosive costs without the normal market mechanisms to control them. Such an approach will not "preserve" Medicare benefits, but only worsen Medicare's financial condition.
Medicare's future is threatened by runaway government spending, not by the President's efforts to reduce the record-high tax burden on American workers. Since FY 1998 alone, federal spending has exceeded the statutory limits by $199 billion, an average increase of 6 percent per year--far more than the inflation rate of 2.4 percent.24 History shows that the only way to make Washington rein in its excessive spending is not to send money to Washington in the first place, but this requires tax reform.
/static/reportimages/D6191B2761B2B54132FE240613F4539C.pdf (March 26, 2001).