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MID-SESSION REVIEW - MEDICARE TRUST FUNDS

MEDICARE TRUST FUNDS 1

Every dollar of Medicare funding is spent on Medicare and Medicare alone in the President's budget.

The President's budget fully funds both the Medicare Hospital Insurance (HI) Trust Fund and Medicare benefits for our nation's seniors and disabled, as required by law. Under the President's budget, the Medicare HI Trust Fund balance will increase by $537 billion, and Medicare spending will reach the highest levels ever, nearly doubling over the next 10 years. The President's budget protects the Medicare program for future generations and continues the promise of full financing of Medicare benefits.

In 2001 the Medicare HI Trust Fund, which provides hospital insurance to seniors and is funded by a payroll tax, will collect $175 billion and spend $143 billion, yielding a $32 billion surplus. Federal law requires that this $32 billion overage be credited to the Medicare HI Trust Fund. However, the federal government does not keep actual dollars in the Medicare Trust Fund, or any other trust fund for that matter. Instead, it lends the money to itself and issues an IOU, in the form of a Treasury security, to the trust fund.

In sum, over the period 2002 to 2011, the projected HI accounting "surplus" of $537 billion is overwhelmed by the SMI's shortfall of $1.14 trillion. There is actually a Medicare shortfall in every year, with a total of $603 billion over the next 10 years. The President has proposed a unified trust fund to make it easier to understand Medicare finances.

Table 4. MEDICARE FULLY FUNDED UNDER ALL BUDGET SCENARIOS

(Dollar amounts in billions)
  Current Projections Alternative Projections
Unified Budget Surplus in 2002 173 200   225   250
Total Medicare Spending in 2002 254 ———— No change ————
HI Trust Fund Balance in 2002 234 ———— No change ————
Increase in Benefits Paid in 2011 Compared to 2002 196 ———— No change ————
HI Exhaustion Date 2029 ———— No change ————

The gap between Medicare's dedicated receipts and spending will widen as the baby boomers enter the program. Between now and 2030 the number of persons age 65 and older is expected to increase rapidly from 40 million to 77 million. Expenses will also rise because healthcare costs are expected to increase.

There is a common misperception that there is a Medicare surplus and that Congress must take action to preserve its assets. There is no Medicare surplus. Any excess cash collected from the payroll tax that is not used to provide hospital insurance is used for other Medicare spending such as doctor bills, which are not fully covered by premiums paid by beneficiaries. These premiums cover only about 25 percent of doctor bills and other costs paid from Medicare's other trust fund, the Part B, or Supplementary Medical Insurance trust fund. Additional funds come from the general fund of the government to cover Medicare's remaining costs. In fact, in 2002, without this general fund transfer, Medicare would face a $48 billion shortfall.

Chart 4. Medicare 2002 Shortfall. This chart shows that payroll taxes and premiums do not cover the entire cost of the medicare program. Premiums from medicare Part B, or the Supplementary Medicare Insurance trust fund, cover only about 25 percent of the program's costs, resulting in a shortfall of $48 billion in 2002. Additional funds must come from the general fund of the government to cover Medicare's remaining costs.

Chart 5. Medicare Long-Term Shortfall. This chart shows that Medicare spending exceeds the total of tax receipts and premiums dedicated to Medicare today, and that this "financing gap" is projected to widen dramatically over the next 75 years.

Myths About the Medicare Trust Fund

     
Today there is much confusion about Medicare spending and the Medicare Trust Funds. Some contend that if the on-budget surplus is less than the size of the Medicare Hospital Insurance (HI) "surplus," this constitutes a "raid" on the HI Trust Fund. This contention is factually false. Under the President's budget the Medicare HI Trust Fund is fully funded; there is no "raid". And Medicare spending continues to rise, as required by law.
Despite the fact that neither Medicare spending nor solvency is affected by the unified budget surplus, some have been misled by assertions that Medicare financing is shrinking. Some worry that this means Medicare won't be there when they need it. This is not true.
The facts are:
  •  The Medicare trust funds are completely unaffected by the enactment of the President's tax plan or the size of the government's surplus. In other words the trust fund balances would not be one cent larger if no tax cut had ever passed. This is also true for the Social Security trust funds.
  •  The President's budget increases Medicare spending $196 billion over the next 10 years, from $228 billion in 2002 to $423 billion in 2011.
  •  The President's budget increases the Medicare HI Trust Fund balance by $537 billion over the next 10 years, rising from $200 billion in the beginning of 2002 to $737 billion at the end of 2011.
  •  According to the Medicare Trustees, Medicare is projected to remain solvent until 2029.
  •  This will be true regardless of short-term fluctuations in budget surplus projections.
  •  The long-term solvency of Medicare depends not on the size of any annual surplus, but preservation of sustained economic growth, and on comprehensive reform of the Medicare program.
  Third party experts and commentators clarify that there is no relationship between Medicare trust fund balances and the unified budget surplus:
  "Does how you use the Medicare annual surplus have any effect on the solvency of the Medicare program? No. [Ir]respective of how the Congress decides to use the annual Medicare surpluses (e.g. tax cuts, spending increases, paying down the debt held by the public), trust fund solvency will not be affected in any way." David M. Walker, Comptroller General of the United States and former Social Security and Medicare trustee, 7/25/01
  "The image of raids on the Medicare and Social Security trust funds is false. The surpluses in these trust funds reflect a temporary excess of payroll taxes over current benefits. When this occurs, the trust funds transfer their spare cash to the Treasury, which gives them `special issue' Treasury securities in return. The trust funds get the securities regardless of how the Treasury uses the spare cash—whether to repay publicly held federal debt or to pay the government's bills. The trust funds simply aren't being raided." Robert J. Samuelson, Newsweek, 7/16/01
    "Q.What can the government do with the surplus? A. It has to spend it, because the federal government can't park that much money in a bank without affecting the financial markets. Q. [I]f we spend money intended for Social Security or Medicare on other government programs, aren't we raiding those programs? A. No. Under government accounting rules, no matter if we use the Social Security and Medicare payroll taxes for debt reduction or plain old spending, the programs receive an equivalent amount in interest-earning Treasury bonds. [N]o matter how the money is used, the programs' trust funds are unaffected because, in effect, they are lending the money to the United States. Q. So does it make a difference whether we use some of the Medicare funds for spending this year? A. Economically, it means virtually nothing in the short run. The government is still running a substantial surplus and paying down debt, but because the U.S. economy is so large, the amount of money involved is like pennies." Glenn Kessler, Washington Post, 7/22/01
    "When an individual buys a government bond, he or she has established a financial claim against the government. When the government issues a security to one of its own accounts, it hasn't purchased anything or established a claim against some other person or entity. The key point is that the Trust Funds do not hold financial resources to pay benefits rather, they provide authority for the Treasury Department to use whatever money it has on hand to pay them. . . .[T]he trust funds themselves do not hold or receive money." David Koitz, Congressional Research Service report, 3/20/01
    "They [trust funds] do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures. The existence of large trust fund balances, therefore, does not, by itself, have any impact on the government's ability to pay benefits." President Clinton's 2000 Budget, Analytical Perspectives, page 337
  1 Trust fund estimates in this section refer to the Mid-Session Review baseline.