Monday, November 23, 2009

First we raid Social Security, then we raid Medicare…

I argued in this piece for AEI's The American online magazine that the health reform bill proposed by Sen. Max Baucus would reduce the 10-year budget deficit only through an accounting trick by which increased Social Security taxes – which should, you know, be saved for Social Security – would be counted against the cost of the plan's increased health coverage.

But it seems that no entitlement is left un-raided: the legislation put forward by Senate Majority Leader Reid, which contains the raid on the Social Security trust fund, would also impose some accounting tomfoolery on Medicare. It's well-known by now that Reid's plan would increase the Medicare payroll tax to help offset the costs of the plan. What I didn't know, though, is that these new taxes would first be laundered through the Medicare trust fund, creating an entirely fictitious improvement in Medicare's financial health. The new taxes are credited to the Medicare trust fund, created an entitlement to new revenues from the rest of the budget. But the actual revenues will immediately be used to cover non-Medicare health costs. Looks like double-counting to me. The folks over at e21 explain.


Bruce Webb said...

Sigh. If any individual or entity buys a bond from the Treasury it scores as an asset for them and as an increase in total Public Debt for Treasury. The actual proceeds from that purchase are spent on other government activities. That is what buying a bond means.

If the government raises that portion of FICA devoted to Medicare Part A the amount of that increase not actually needed for current Part A provider payments is used to 'purchase' a special category of Treasury Bonds, special because their actual face value yields are sheltered from market fluctuations in the Public Debt market while at the same time are calleable by Treasury at will.

To call this process double counting is to embrace somequite odd legalistic and existential arguments that entities can't owe themselves money, something that would come as a huge surprise to any large organization like say a major University where departments bill and receive funds from other Departments.

Back in the day I was supervisor of a fee-based document delivery system at Berkeley which mostly ran on a deposit/debit system but had some Professors/Institutes that routinely ran negative balances. For them to argue that they didn't owe the money because the Library and most Departments reported to the same Vice Chancellor would have been absurd, I had money "in the bank" and absent some direct action by the University President or the Regents or the Leg could count on using it to make my payroll and pay the Library print/copy shop.

Arguments that an increase in FICA devoted to HI is somehow not real because the dollars end up temporarily get spent somewhere else is just as absurd as arguing that when we raised our retrieval/delivery fee to $2.50 from $2.00 that the increased balance wasn't real or was double counted because my payroll costs didn't immediately increase to match.

There is an excuse for this kind of fuzzy glibertarian special existential pleading from GMU folk, but we count on more from people who held high offices of trust in the Federal Government. Casting doubt on Full Faith and Credit should be a non-starter.

Andrew G. Biggs said...

Bruce --

There's no reason the House bill -- which raises income tax rates to fund the plan -- couldn't do the same thing. Just write the bill so that new tax proceeds are credited to the trust fund, then use the cash to pay for the non-Medicare health coverage. I'm not saying the debt isn't binding, only that there's no meaningful saving going on at the economic level, which makes the increase in assets in the fund non-meaningful economically. And it's at that level that funding Medicare (or other programs) is going to bite us: how much do we have to put aside to fund the program?