Trust fund solvency distractions

WASHINGTON — The annual trustees’ reports for Social Security and Medicare — the 2013 editions have just been released — are supposed to keep the public well-informed about these popular programs. In reality, they do just the opposite: They confuse and mislead. Worse, they allow politicians to duck the hard issues surrounding both programs.

What we ought to be debating is how much spending on retirees will dominate government. Instead, we focus on the actuarial soundness of the trust funds, a baffling subject only tangentially related to the basic choices facing the country. The trust funds should be abolished.

In the public mind, the trust funds suggest that Social Security and Medicare are quarantined from the rest of government. As long as the funds remain solvent, promised benefits can be paid. So policy focuses on strengthening the trust funds. Against that background, it was inevitable that the trustees’ latest reports would be cast as good news. Slower- t han- expected increases in health costs have extended the life of the Medicare trust fund until 2026, two years later than last year’s estimate. The Social Security trust fund is projected to pay promised benefits through 2033, the same as last year. This seems comfortably distant. Be skeptical. Dive into the reports and there’s precious little cause for optimism. As the baby boom ages, the costs of these programs will mushroom. Millions of Americans believe Social Security is a stand-alone program whose spending is covered by the payroll taxes cascading into the trust fund. Many others think the same of Medicare. Neither assumption is true.

Here’s what we learn from table V. F1 on page 225 of the Medicare report. In fiscal 2012, Social Security and Medicare benefits totaled $1.323 trillion. Payroll taxes, Medicare premiums and other fees came to $920 billion. On a cash-flow basis, this left a deficit of $403 billion, $243 billion for Medicare and $160 billion for Social Security. The deficit had to be covered by general revenues from the Treasury and represented 37 percent of the overall 2012 federal deficit of $1.087 trillion.

The numbers debunk the notion that Social Security and/or Medicare don’t affect the deficit. Payroll taxes cover only some of their spending. All the mumbo-jumbo about trust fund balances (which are, in an accounting sense, boosted by interest credited to them by the Treasury) obscures this. Choices exist. A dollar spent on Social Security or Medicare can’t be spent on border control, highways, school lunches, financial regulation, military readiness or the Forest Service. A dollar in taxes to support Security or Medicare can’t be used for other purposes.

The prospect is for much more of the same. Go to table V. F2, which projects the outlook for Social Security and Medicare over the next 75 years. In that period, the actuaries estimate that payroll taxes, Medicare premiums and other dedicated taxes and fees will total $73.2 trillion. Unfortunately, projected spending is more than 50 percent greater at $112.8 trillion. Somehow, the gap will have to be closed by squeezing other programs, raising taxes, borrowing or cutting Social Security and Medicare benefits. (All these estimates reflect “present value,” with future dollars converted into their worth today.)

Well, couldn’t the health spending slowdown rescue us? Maybe. After surprising many experts, it might continue to surprise. But Medicare’s actuaries think that the opposite is more likely: Projected health spending will understate costs.

One unrealistic assumption is that Congress will reduce doctors’ Medicare reimbursement rates by 24.7 percent in 2014. That’s “implausible,” writes Paul Spitalnic, Medicare’s acting chief actuary, in an appendix to the report. Congress has repeatedly overridden similar cuts in the past. Likewise, the projections include lower Medicare reimbursements for hospitals and other providers mandated by the Affordable Care Act. Spitalnic also thinks these are unrealistic and ultimately likely to be overturned by Congress.

We need to modernize Social Security and Medicare to reflect longer life expectancy, the growing economic wealth of the elderly, health care’s high costs and the burden these programs impose on the rest of society. The obsession with the solvency of the trust funds is a madness that bewilders the public and distracts attention from the larger issues. Of course, the trust funds won’t be abolished, precisely because the political class doesn’t want to face the larger issues.