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Medicare Lockbox Rejected The Senate recently rejected two Medicare lock-box proposals. Both proposals would have walled off Medicare surpluses from other government spending. At stake is an estimated $526 billion Medicare surplus over the next decade. The Medicare surplus, financed from the Medicare payroll tax, is currently reserved for paying for Medicare Part A (hospital insurance). The cost of Medicare Part B (doctors insurance) is covered by premiums from enrollees and out of the general federal revenues which include capital gains, federal withholding, corporate, and excise taxes. The recently approved budget would change that mix by using $526 billion from the Medicare Part A Trust Fund to also fund Part B. Although the Bush Administration vowed that all the revenues from the Medicare Part A Trust Fund would be used exclusively for Medicare, the effect of this would be to free up general federal revenues once used for Part B, for other purposes. This could include the proposed tax cut. By combining the two parts of Medicare in this manner and thus excluding general federal revenues as a funding source, Medicare would be forced into an immediate deficit. This is due to the nature of government trust funds-which are unlike any regular trust fund. The Medicare and Social Security Trust Funds contain no cash assets. The government issues `special obligation bonds` to account for the surplus, and the money is immediately used for other purposes. Special obligation bonds cannot be bought or sold on the open market but represent an I.O.U. from one part of the government to another. Because the Medicare Part A surplus for FY2002 would not be great enough to cover both Part A and Part B, the government would be forced to start redeeming the IOUs in the Medicare Trust Fund. To redeem the IOUs without using the general revenue surplus, the government must raise taxes, borrow, or cut Medicare spending and benefits. Raising taxes has been ruled out by the budget plan, which calls instead for a massive tax cut. Presumably the government would not borrow either, because the Social Security surplus is to be devoted for re-payment of the debt, (or reform of the program). Previously, debt repayment meant the repayment of the general federal debt and not the debt held by the Social Security or Medicare Trust Funds. This could change. Under the Social Security `lockbox` rules there is nothing to prevent Congress from using the Social Security surplus to re-pay IOUs (debt) owed to the Medicare Trust Fund. Also unknown is what Medicare spending or benefits may go under the knife. Under the budget assumptions it would be extremely difficult to add a prescription drug benefit to Medicare (see `Prescription Drug Update` below). Beneficiaries could also be hit with steep Medicare premium increases and higher co-payments and deductibles. TSCL is highly concerned by the budget blue print and urges TSCL members to remain in contact with your Members of Congress on this issue. Sources: `Medicare Becomes Critics` Weapon in Tax Cut Battle,` Amy Goldstein, The Washington Post, March 13, 2001. `A Medicare Shell Game,` The Washington Post, February 4, 2001. To read a related story on our website, click on the headline below: `Bush Advisor Suggests Using Social Security Surplus to Pay For Tax Cut`
This article first appeared in Volume 6, Issue 7 of "The Social Security and Medicare Advisor" newsletter (June/2001). To receive future editions of "The Advisor" in its special, free e-mail version, please click here.
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