CBO: Democrats Double-Counting Medicare Savings

By Megan McArdle

"This bill will strengthen Medicare and extend the life of the program."

- President Barack Obama, after the Senate health care bill secured 60 votes

The notion that the health care reform bill would make Medicare more solvent and also expand benefits never made any sense.  The health care reform bill makes cuts to Medicare, and uses them to pay for new spending; to the extent that we think we need to pay for, um, Medicare with cuts to Medicare, this bill actually weakens either the program, or our future budgets.

I mostly ignored claims to the contrary because they seemed so self-evidently stupid.  But then this graphic started a-circulating among pundits who favored health care reform:

It's from the Wonkroom blog at the Center for American Progress, and as you can see, it puts this claim up there front and central.  As you can see from the quote above, it's not just an error made by one pundit.  As I recall, the claim was made more than once during the Senate debate, and of course, by our president in selling the bill.  The graphic was very widely distributed.

Unfortunately, the CBO finally got around to ruling on this question (hat tip Phil Klein), and no, this is not actually going to fix the Medicare budget problem; it's an artifact of the way the government accounting is done. 

The explanation is a little complicated, and I'm not sure how many of you want to go through it, but I'll try my hand at a reasonably succinct explanation.  Basically, Medicare, like Social Security, has a "trust fund" (actually, more than one), which is supposed to fund it until the trust fund is exhausted in 2019.  The "trust fund" does not exist in any meaningful sense, because its "assets" consist of claims on the general fund, i.e. all the rest of the tax money.  As Medicare goes into deficit, it trades in those assets to cover its funding gap, which means the general fund has to find the money to pay off the special bonds by either raising taxes, cutting other spending, or borrowing more money.  After the trust fund is exhausted, the general fund has to find the money to pay for the Medicare deficit by either . . . raising taxes, cutting other spending, or borrowing more money.  The difference to taxpayers is nil.

Technically, when you cut Medicare spending, that money shows up as an increase in the Medicare trust fund, rather than some other possible accounting entry.  But the effect on the unified budget is the same:  the money saved by cutting Medicare is spent on other stuff.  Whether Medicare is "calling bonds" or "demanding money to cover its deficit", we still have to find exactly as much money to pay for Medicare as we did before.  Which is a lot of money.  One of the reasons the projected deficits for the rest of the decade are so big is that the cost of Medicare is outstripping the revenue raised by its payroll tax, and so we have to shovel in more and more money from the general fund.

So while you can technically claim that you have increased the Medicare trust fund, you then have to recognize that you have introduced an equally sized liability on the general fund, which would mean that this bill increases the deficit by hundreds of billions of dollars, rather than reducing it.

Or as the CBO says:

The key point is that the savings to the HI trust fund under the PPACA would be received by the government only once, so they cannot be set aside to pay for future Medicare spending and, at the same time, pay for current spending on other parts of the legislation or on other programs. Trust fund accounting shows the magnitude of the savings within the trust fund, and those savings indeed improve the solvency of that fund; however, that accounting ignores the burden that would be faced by the rest of the government later in redeeming the bonds held by the trust fund. Unified budget accounting shows that the majority of the HI trust fund savings would be used to pay for other spending under the PPACA and would not enhance the ability of the government to redeem the bonds credited to the trust fund to pay for future Medicare benefits. To describe the full amount of HI trust fund savings as both improving the government's ability to pay future Medicare benefits and financing new spending outside of Medicare would essentially double-count a large share of those savings and thus overstate the improvement in the government's fiscal position.

It's a little disappointing, really. At the rate that Democratic politicians were generating ever-more-spectacular budget savings from the same old set of health care proposals, I had expected our looming fiscal problems to be permanently resolved by this time next week.

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