Americans are understandably confused by the
rhetoric in Washington over the possible impact of President Bush's
tax and budget plans on federal programs, especially Medicare. The
arcane character and complexity of Medicare's financing formulas as
well as the federal budget make it easy for opponents of the
President's plan to misrepresent Medicare's true financial
condition and frighten vulnerable senior citizens. The fact is that
both eligibility for Medicare and Medicare benefits are
entitlements set by law. Moreover, neither President Bush nor any
principal congressional proponent of Medicare reform is proposing a
change in Medicare eligibility or benefits in order to provide tax
relief.
Medicare reform and tax relief are both vital to
the economic health of the country and achievable. Nevertheless,
opponents of these policies often make claims that pit tax relief
against Medicare reform. These "Mediscare" claims are riddled with
misinformation. For example:
-
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. 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.
- Claim #2: Medicare reform with tax
relief will require Congress to cut seniors' benefits. In
reality, no serious Medicare reform proposal includes a net cut in
benefits. In fact, the Bush budget plan devotes $153 billion over
10 years to additional Medicare spending. A bipartisan Medicare
proposal introduced by Senators John Breaux (D-LA) and William
Frist (R-TN) also calls for an improved package of benefits that
includes prescription drug and catastrophic coverage.
President Bush's tax relief plan does not
threaten the Medicare trust fund or Medicare benefits. This is true
whether one uses a static estimate of the tax revenue "cost" of
Bush's tax reduction plan ($1.7 trillion) or a more accurate
dynamic estimate of the cost of the Bush tax plan ($1.1
trillion). Strengthening the economy by
lowering tax rates will actually increase employment, and thus the
employment-based federal payroll tax revenue going into the
Medicare trust fund for hospitalization insurance. Moreover,
Congress could provide substantially more tax relief than the $1.35
trillion called for in its budget resolution without threatening
Medicare.
Taxpayers and seniors need an honest
debate. The gravity of the issues involved and the need for
carefully constructed long-term reforms of the Medicare system
require a different way of doing business in Washington.
MEDICARE'S COMPLICATED FINANCIAL
CONDITION
The Medicare
program today covers approximately 40 million retired and disabled
persons.
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.
- Medicare Part B pays for physician
and outpatient services and is financed by a combination of
beneficiary premiums and general tax revenues. The Part B, or
Supplemental Medical Insurance (SMI), trust fund is simply an
accounting device; it cannot be threatened with insolvency because
it is open-ended. The amounts of funds for Part B that come from
beneficiary premiums and from general tax revenues are
automatically adjusted each year to cover the cost of its benefit
payments.
Medicare's Financial Condition
The President's Assessment. The
President's budget plan acknowledges that Medicare will have a
surplus of $526 billion from FY 2002 to FY 2011 but notes correctly
that this amount comes entirely from Part A of the program. Because it would be
inaccurate to mention this surplus without also mentioning Part B's
rising costs and increasingly large draw on general tax revenues,
combining the bottom lines for Part A and Part B gives Americans a
better understanding of Medicare's total financial condition.
From the perspective of the overall
federal budget, Part B will have a $1.2 trillion deficit from FY
2002 to FY 2011, a cost that will have to be paid using general tax
revenues since SMI beneficiary premiums cover only 25 percent of
Part B's program costs. As President Bush
correctly notes, the total Medicare program--both Part A and Part
B--will not experience a surplus from FY 2002 to FY 2011. It will
actually run a $645 billion deficit that must be covered by general
tax revenues (see Table 1).
This
presentation of Medicare financing is an honest assessment of the
entire program's fiscal condition. 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.
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. 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.
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
Analysis
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
Fund
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).
MEDISCARE TACTICS AND MISLEADING CLAIMS
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." 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."
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). 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.
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. 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. 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. 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. 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. 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." 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.
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. 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.
AVOIDING DESTRUCTIVE POLITICS
Americans were put through a bitter and
confusing debate on Medicare in 1995 and 1996. Misrepresentations
of the purpose and substance of the reform proposals succeeded in
derailing serious efforts to put Medicare on a firmer financial
footing, delayed necessary changes in the program, and contributed
to the decline in the civility of American political discourse.
Former President Clinton accused congressional leaders of trying to
"destroy" Medicare, and his allies in Congress echoed that
charge. The editors
of
The Washington Post were so dismayed by the
poisonous attacks on reform efforts that they wrote, "There's
plenty to be said about the proposals the Republicans are
making.... But that's not what the Democrats are engaged in.
They're engaged in demagoguery, big time."
Improving the health care system for the
next generation of retirees is a serious task. Experts from the
Congressional Budget Office, the General Accounting Office, and the
Office of Management and Budget all stress that Medicare needs to
be reformed. A summary of the 2001 annual report from the Medicare
Trustees concludes that Medicare needs to be reformed and
strengthened at the "earliest opportunity." Nevertheless, the
opponents of tax relief and Medicare reform are trying to block the
Administration's efforts; as one newspaper article noted,
"criticisms from Democrats and their allies suggest that they have
decided that, in trying to obstruct the tax cut, they can wield the
Byzantine financing of Medicare to their advantage."
Members of Congress should refrain from
engaging in divisive politics that derail efforts to improve
Medicare and the tax code, and they should ignore the rhetoric of
those who promote that agenda. Moreover, they should be aware that
by refusing to act responsibly now, they are ensuring that their
options will be far more difficult in the future: to make real cuts
in Medicare benefits or to approve huge tax increases in order to
cover the program's soaring costs. Members of Congress should work
together in a bipartisan fashion with the Administration to craft
sound reforms before the first wave of the baby-boom generation
becomes eligible for Medicare in just 10 years.
CONCLUSION
Congress should recognize the real
distinction, underscored in the President's budget, between tax
policy and Medicare reform and examine each of the President's
policy proposals on its own merits rather than relying on claims
that reforming tax policy will seriously affect Medicare financing.
In 1995, misleading and often sensational claims, including
deceptive information on the budgetary impact of the reform
proposals, marred the Medicare reform debate. Seniors and taxpayers
need an honest debate by their representatives and elected
officials in Washington, not misrepresentation and misinformation.
The gravity of these issues and the need for carefully constructed
long-term reforms require bipartisan cooperation and a different
way of doing business in Washington.
Robert
E. Moffit, Ph.D., is Director of Domestic Policy Studies,
and D. Mark Wilson is a former Research Fellow in the Thomas A. Roe
Institute for Economic Policy Studies, at The Heritage
Foundation.
Endnotes