Medicare and Budget Surpluses

The President proposes to use about two-thirds of the projected budget surpluses over the next 15 years to reduce publicly held debt. At the same time, he also proposes to transfer a like amount to the Social Security and Medicare trust funds in the form of nonmarketable Treasury securities, which is projected to extend the life of Medicare's Hospital Insurance (HI) trust fund from 2008 to 2020. His proposal would trade debt held by the public for debt held by the Social Security and Medicare trust funds. These new Treasury securities would constitute a new unearned claim on general funds for the HI program--a marked break with the payroll tax-based financing structure of the program. This change could undermine the remaining fiscal discipline associated with the self-financing trust fund concept and could induce a false complacency about the financial health of the HI program. Without change, however, Medicare is projected to more than double its share of the economy by 2050, and Social Security, health, and interest will take nearly all the revenues the federal government takes in. Real and substantive Medicare reform, not simple financing shifts among funds within the budget, is essential. Acting now would allow changes to benefits and health care delivery systems to be phased in gradually so that stakeholders and participants would have time to adjust their saving or retirement goals.

GAO noted that: (1) the President's proposal would significantly reduce debt held by the public from current levels, thereby also reducing net interest costs, raising national savings, and contributing to future economic growth; (2) it provides a grant of a new set of Treasury securities for the Medicare Hospital Insurance (HI) program which would extend the life of the HI trust fund from 2008 to 2020; (3) it is important to note that these new Treasury securities would constitute a new unearned claim on general funds for the HI program--a marked break with the payroll tax-based financing structure of the program; (4) this would be a significant change that could serve to undermine the remaining fiscal discipline associated with the self-financing trust fund concept; (5) the proposal has no effect on the current and projected cash-flow deficits that have faced the HI program since 1992--deficits that taxpayers will continue to finance through higher taxes, lower spending elsewhere or lower paydowns of publicly held debt than the baseline; (6) importantly, the President's proposal would not provide any new funds to pay for medical services; (7) it does not include any meaningful program reform that would slow spending growth in the HI program; (8) in fact, the transfer of these new Treasury securities to the HI program could very well serve to reduce the sense of urgency for reform; (9) at the same time, it could strengthen pressure to expand Medicare benefits in a program that is fundamentally unsustainable in its present form; (10) the current Medicare program is both economically and fiscally unsustainable; (11) the program's continued growth threatens to crowd out other spending and economic activity of value to the society; (12) even if the entire surplus is saved, Medicare is projected to more than double its share of the economy by 2050; (13) meaningful reform of this program is urgently needed and such reform will require hard choices; (14) the program changes enacted in 1997 illustrate how difficult even incremental reform is to adopt; (15) major change requires reshaping the nation's perspective on health care consumption and drawing distinctions between what the nation needs, wants, and can afford both at the national and individual level; (16) to be effective and sustainable, reforms must begin soon and be comprehensive in nature; and (17) such reforms must be introduced gradually after widespread public education in order to garner sufficient support from the system's multiple stakeholders.