Medicare Is Not Going Broke
To appreciate this statement, one must first wade through the complexity of Medicare accounting.
Medicare Part A (hospital insurance) is funded with a tax of 2.90% total on all payroll income, plus an extra .90% on income that exceeds $250,000.
For the first thirty years of Medicare, the annual receipts from payroll taxes exceeded the benefits paid out. The government created a paper “trust fund” with these surpluses. This was good publicity for the stability of Medicare Part A.
The surpluses were invested in Treasury bonds. The Medicare trust fund thus holds a combination of current receipts and previously purchased savings bonds.
However – Since about 2010 — due to baby boomers retiring, plus medical inflation– the payroll tax receipts have often been less than benefits paid out.
Therefore the “trust fund” balance would normally decline every year. This would erode public confidence in Medicare.
To avoid bad news, the decline has been ‘covered’ each year by cashing in some of the old Treasury bonds.
For example:
If the trust fund’s expenses are $300 billion and payroll tax receipts are $250 billion, then Medicare cashes in $50 billion of old bonds to stay in balance.
(Of course, the bonds are redeemed at the U.S. Treasury. There is no ‘free lunch’ for the taxpayers.)
However, the reserve of old bonds will likely be gone by 2030.
At that point, if payroll taxes do not cover all hospital benefits, Medicare would assumedly have to shrink its coverage or lower its fee schedules, and probably both.
This would indeed be true if a future Congress will be unable to raise a single tax. Right-wingers project a Grover Norquist-nightmare scenario, where the trust fund keeps shrinking until Medicare eventually disappears.
However: There are several actions that a future Congress might take without creating a national trauma:
Action #1: Raise the Part A payroll tax for everyone, rich and poor;
If the payroll tax went from 2.90% to 3.90%, (counting both employer and employee share), would this be the end of the world?
A worker making $60,000 a year would see a tax increase of about $50 per month. This tax hike would bring in an extra $80 billion a year, enough to balance the accounts, at least at this time.
Action #2: Require seniors to pay a monthly premium for Part A:
Right now, Part A is premium-free, though most seniors do pay $174 a month for Part B.
Imposing a higher Part A premium would certainly ‘share the pain’ of Medicare funding — but it would probably meet with too much popular resistance.
Action #3: Raise additional revenue with a tax on Sub-S business owners – (which Joe Biden himself went out of his way to avoid.)
We should require Sub-S business owners to pay the 3.8 percent payroll tax on all distributions from their companies – not just their small ‘salaries’ — and then increase the tax’s rate from 3.8 percent to 5 percent.
Biden and his wife Jill circumvented over $500,000 in such payroll tax obligations over time; the same is true for John Edwards, Newt Gingrich, and many others.
Action #4: Allow the government to pay Part A benefits directly from the Treasury’s general fund.
In other words, just terminate all the artificial trust fund accounting.
Medicare Part A would then be funded from general revenue — just like the military, the judiciary, the National Parks, food stamps, Medicare B, C. and D, and almost every other federal program.
The annual budget deficit in “general revenue’ items is much larger than the ‘trust fund’ deficits in Medicare Part A. We still have to deal with our enormous federal spending.
Put it this way — Medicare may indeed run out of “easy money.” However, this is not equivalent to “running out of money”, in the sense of being unable to write federal checks.
That only happens in the fantasies of deficit hawks. Medicare Part A is not going to go bankrupt over a shortfall of about $50 billion a year. That is frankly a stupid course of action, and can be temporarily cured by highly-bearable new taxes.