NCPA - National Center for Policy Analysis

THE MEDICARE TRUST FUND BLUES

April 28, 2009

There is no reason to worry about Medicare's Trust Fund.  Or the Social Security Trust Fund.  Or the Highway Trust Fund.  Or any other federal government trust fund -- with one or two exceptions, says John C. Goodman, President and CEO of the National Center for Policy Analysis.

The reason?  These are not really trust funds.  They do not collect or disperse money.  They hold no real assets.  They perform an accounting function (keeping track of the inflow of dedicated revenues and the outflow of funds to the programs they support), which occasionally forces Congress to act.  But they perform no economic function (collecting, saving, investing, etc.).  No money has been salted away in bank vaults.  No securities were purchased on Wall Street.

The so-called assets of these funds are created on a computer keyboard, explains Goodman: 

  • They really are IOUs the government writes to itself.
  • But since every "asset" of a trust fund is a "liability" of the Treasury, summing over both parts of government (the Treasury plus the trust fund), assets minus liabilities net out to zero.

Occasionally people (for some reason, they are disproportionately on the left) will argue that the assets of these trust funds really can be used to pay benefits.  Were that true, there would be an easy solution to our financial woes, says Goodman.  President Obama, by Executive Order, could instruct the typists to double, triple or quadruple the number of IOUs the trust funds hold.  After all, it is just as easy to hit the "2" key as the "1" key.  A "4" is just as easy to punch as a "2."  But alas, you cannot increase wealth or purchasing power by writing IOUs to yourself.

So what should we worry about?  Cash flow.  In a pay-as-you-go system, like Medicare or Social Security, cash flow is the only thing that matters.  And for as far as the eye can see, the inflow and outflow of cash look very bleak, says Goodman.

For some time, Social Security and Medicare combined have been paying out more than they are receiving in dedicated taxes and premiums.  To cover that deficit, we have been drawing on the general revenues (mainly income taxes) of the federal government, explains Goodman:

  • By 2012, we will need 1 in 10 income tax dollars for this purpose.
  • By 2020, 1 in 4.
  • By 2030, 1 in 2.

Elderly entitlements are on a course to crowd out everything else the federal government is doing, says Goodman.

Source: John Goodman, "The Medicare Trust Fund Blues," NationalJournal.com, April 27, 2009.

For text:

http://healthcare.nationaljournal.com/2009/04/the-medicare-trust-fund-blues.php?rss=1 

 

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