COMMENTARY SERIES
Health Care “Reform”: The Death Knell for the
Medicare and Social Security Trust Funds?
e21 Staff Editorial | January 14, 2010
If President Obama signs health care legislation
resembling either the Senate or House bills, one
little-noted consequence is virtually certain: it will
deal a mortal blow to the credibility of Social Security
and Medicare Trust Fund financing.
Should such legislation pass, no serious person
on either side of the aisle can reasonably attach
legitimacy to Trust Fund accounting going forward.
What remains to be seen is the extent of the ultimate
damage done to the Social Security and Medicare
programs as historically operated.
The fundamental principle underlying the Trust
Funds is that each program’s spending must
be generated by its own dedicated revenue
stream . . . Over the years, a number of
developments have corrupted the integrity of
the Trust Fund concept.
To be sure, not everyone takes Trust Fund financing
seriously now. Many analysts believe that Trust
Fund accounting has already become too corrupted
to remain budgetarily meaningful. Still, it is quite
possible that historians will look back on this political
moment as the event that signaled the ultimate
demise of the Trust Fund concept.
Why? The short answer is that the health care
bills purposely exploit Trust Fund financing. The
Senate bill, in particular, reduces Medicare spending
by more than $400 billion over ten years, while
simultaneously increasing the Medicare payroll
tax. While the scorekeeping books will show these
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measures as extending Medicare solvency, the full
amount of the savings will be spent elsewhere – by
the very same bill.
To fully appreciate why this matters, it’s necessary to
quickly review the Trust Funds’ long history, and the
debates surrounding them.
A little background: For several decades, Social
Security – and later Medicare – has theoretically been
financed through a separate (and dedicated) Trust
Fund. This was done to segregate the programs
from the general treasury (which is used for most
other federal programs) and to provide an explicit
link between the payroll taxes and the programs
they were designed to fund.
This Trust Fund concept has been used to protect
Social Security and Medicare from competition for
resources within the federal budget. At the same
time, the Trust Funds were also supposed to serve
as a form of fiscal discipline upon the programs
themselves – by delineating and limiting the total
amounts they were permitted to spend.
The fundamental principle underlying the Trust
Funds is that each program’s spending must be
generated by its own dedicated revenue stream. In
the cases of Social Security and Medicare Part A,
this is accomplished by a payroll tax upon wages.
The programs then could not spend any more than
the dedicated revenue stream provided.
What has happened? Over the years, a number of
developments have corrupted the integrity of the
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Health Care “Reform”: The Death Knell for the Medicare and Social Security Trust Funds?
Trust Fund concept. For example, a Trust Fund for
Medicare Part B was established, even though the
vast majority of its revenue comes from an open
tap on the general budget (effectively ignoring
the dedicated funding stream concept). A similar
method was later employed for Medicare Part D.
Each of these programs is essentially deemed to be
solvent by accounting definition, even though neither
program generates anything close to the budgetary
resources that it appears to command.
vociferous, experimenting with novel arguments in
defense of Trust Fund accounting – and a variety of
assertions were made. For instance, it was asserted
that the redemption of bonds in the Trust Fund would
simply square a debt owed by the rich to the poor;
it was also asserted that the Trust Fund buildup and
drawdown was the premeditated 1983 plan (both
of these claims are incorrect); and it was asserted
that the Social Security surpluses had been used by
the federal government to build savings indirectly,
borrowing less than it otherwise would have (also
untrue).
[T]hese instances of creative accounting were
poorly understood by the press and public, and
the larger Trust Fund debate was primarily a The 1983 reforms weren’t the only relaxation of the
debate between eggheads – so there has been
integrity of Trust Fund financing in recent years. In
no public resolution of the controversy.
the late 1990s, the Clinton Administration proposed
The 1983 Social Security reforms dealt another extending the Trust Fund on paper by doubleblow to the integrity of Trust Fund financing. Those crediting the program’s surpluses. More recently,
reforms generated substantial annual Social Security the Obama Administration portrayed their “Making
surpluses – $2.5 trillion altogether – that persisted Work Pay” provision as relief from payroll taxes
until earlier this year. These surplus revenues were while crediting those same payroll taxes in full to the
“borrowed” by the general treasury and used in Social Security Trust Fund.
effect to finance other federal spending, continuing
Still, these instances of creative accounting were
the deterioration of holding sacred the link between
poorly understood by the press and public, and the
a funding stream and the program it is designed to
larger Trust Fund debate was primarily a debate
fund.
between eggheads – so there has been no public
The decades of Social Security surpluses provoked resolution of the controversy. Many private citizens
a fierce debate among economic policy analysts. understood implicitly that Trust Fund monies were
For many years after the 1983 reforms, CBO, being persistently spent, but it was always possible
GAO, and even the Clinton Administration’s OMB to find a partisan advocate to make the opposite
somberly explained in various publications that case.
the Social Security Trust Fund constituted merely
No more-or, at least, not if health reform passes.
the permission to spend money rather than a true
accumulation of resources, since nothing was The proponents of these health care bills have made
(literally) being saved.
it all too simple: they’re going to raise Medicare
taxes, and cut Medicare spending – and they’re
The experience of dissipating the Social Security
going to whisk that money right out the door. There
surpluses thinned the ranks of Trust Fund defenders.
is no pretense otherwise. The government’s books
Their rear guard nevertheless became more
will show an illusory extension of Medicare solvency,
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Health Care “Reform”: The Death Knell for the Medicare and Social Security Trust Funds?
even as the money is transparently spent on other
things, all in the same bill.
The undermining of the Trust Funds is so blatant that
the non-partisan CBO and CMS Actuary have been
unwilling to remain silent about it. The CMS Actuary
blew the whistle first, writing that “the improved part
A financing [resulting from the Senate health bill]
cannot be simultaneously used to finance other
Federal outlays (such as the coverage expansions
under the PPACA) and to extend the trust fund,
despite the appearance of this result from the
respective accounting conventions.”
Perhaps the greatest irony of all this is that legislation
to obliterate the appearance of Trust Fund solvency
has been supported by the AARP, an avid defender of
Medicare and Social Security. When this destruction
of the Trust Fund barrier inevitably results in future
reductions in Social Security and Medicare benefits,
it will be interesting to see how AARP defends their
collaboration in this decisive ploy.
CBO then followed suit, explaining that “savings to
the HI trust fund under the PPACA would be received
by the government only once, so they cannot be set
aside to pay for future Medicare spending and, at the
same time, pay for current spending on other parts
of the legislation or on other programs.”
Translation: Medicare solvency is not actually being
extended in this bill.
No one can say what the ultimate result of the health
care accounting games will be. Congress has played
accounting tricks with the Trust Funds before. What
is different this time, however, is that the ideas
behind transparent and functional Trust Funds have
been fully, and perhaps finally, obliterated. This is
a lesson the political system should – and almost
surely will – not soon forget.
Once there has been a willful abandonment of the
appearance of legitimacy in Trust Fund accounting,
then the barrier between Social Security/Medicare
and the rest of the federal budget is practically
dissolved. Social Security and Medicare can no
longer be shielded from budget cuts with the defense
that their Trust Funds are still in the black; everyone
will know this is meaningless.
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