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Medicare's Hospital Program Went Broke in 2007. Nobody Noticed.

Gary North
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Aug. 8, 2009

This is taken from a March 25, 2008 press release from the U.S. government's Department of Health and Human Services.

This year the HI Trust Fund will spend more than its income, and from 2009 through 2017, about $342 billion will need to be transferred from the Federal treasury to cover beneficiaries' hospital insurance costs.

The hospital trust fund is the heart of Medicare.

Was this front-page news? Of course not. Did the media cover this up? In the sense of not reporting it, yes. In the sense of actively comprehending it and deliberately suppressing it, no.

The one-sentence admission indicated that the Federal deficit is going to climb. Medicare is politically untouchable. Old people have been promised coverage, and no politician is going to tell granny she must fork over her life's savings to pay for her own health care expenses. Not yet, anyway. Not this year.

But what about the famous Medicare trust fund? Whenever we read about Medicare's projected deficit, it always refers to Medicare's trust fund. It never says this: "Medicare's trust fund is 100% filled with unmarketable IOUs from the U.S. Treasury." Yet that is the situation. Medicare's trust fund is just like Social Security's.

You may think, "North, you are exaggerating. It can't be this bad." Well, if I'm exaggerating, it's because I believe the Board of Trustees of Social Security and Medicare. I think you should, too.

In a little-noticed official report, A SUMMARY OF THE 2009 ANNUAL REPORTS Social Security and Medicare Boards of Trustees, the public is presented with the truth. The truth is not expressed in stark language. The truth is too shocking. Bureaucrats cover up shocking truths with bureaucratese. But they are required by law to tell the truth, statistically speaking.

Let me take you through the highlights.

As was true in 2008, Medicare's Hospital Insurance (HI) Trust Fund is expected to pay out more in hospital benefits and other expenditures this year than it receives in taxes and other dedicated revenues. The difference will be made up by redeeming trust fund assets.

Truth: Expenditures will exceed revenues in 2009. They did in 2008, too. The phrase, "reducing trust fund assets" means "raiding the cookie jar."

Then comes the initial cover-up: no mention of the nature of the assets in the trust fund. What is said about reducing trust fund assets is true. What is not said is far more significant.

Growing annual deficits are projected to exhaust HI reserves in 2017, after which the percentage of scheduled benefits payable from tax income would decline from 81 percent in 2017 to about 50 percent in 2035 and 30 percent in 2080.

That seems to indicate that we have time before the cookie jar is empty: until 2017. We don't. Here's why.

In addition, the Medicare Supplementary Medical Insurance (SMI) Trust Fund that pays for physician services and the prescription drug benefit will continue to require general revenue financing and charges on beneficiaries that grow substantially faster than the economy and beneficiary incomes over time.

Then comes more truth.

The drawdown of Social Security and HI Trust Fund reserves and the general revenue transfers into SMI will result in mounting pressure on the Federal budget. In fact, pressure is already evident.

If the trust fund were filled with corporate bonds or bonds issued by foreign governments, the sale of trust fund assets would not have any effect on the Federal deficit. But because the trust fund contains nothing but Treasury IOUs, it will have an effect on the deficit. It will raise it.

This means that funds from general revenues must pay Medicare obligations this year. Problem: General revenues in fiscal 2009 are expected to be $1.8 trillion in the red (estimate of the Congressional Budget Office). The Treasury must borrow this money.

This problem in Medicare funding did not begin this year.

For the third consecutive year, a "Medicare funding warning" is being triggered, signaling that non-dedicated sources of revenues--primarily general revenues--will soon account for more than 45 percent of Medicare's outlays. A Presidential proposal will be needed in response to the latest warning.

Later in the report, the Trustees admit the truth about the trust funds. Those few people who read the entire report do learn what is going on.

What Are the Trust Funds? Congress established the trust funds in the U.S. Treasury to account for all program income and disbursements. Social Security and Medicare taxes, premiums, and other income are credited to the funds. Disbursements from the funds can be made only to pay benefits and program administrative costs.

The Department of the Treasury invests program revenues in special non-marketable securities of the U.S. Government on which a market rate of interest is credited. The trust funds represent the accumulated value, including interest, of all prior program annual surpluses and deficits, and provide automatic authority to pay benefits.

Translation: Both trust funds are 100% invested in IOUs from the government.

This has always been true. The voters are unaware of this. They do not think "my bank account" when they hear "trust fund."

From now on, Medicare taxes will not cover Medicare hospital costs. Medicare will have to raid the government's cookie jar or some other cookie jar. But these jars are also running huge deficits, especially the general fund. The exception: Social Security.


Part of that general fund deficit is covered by Social Security revenues (FICA). These revenues are paid into Social Security by employers and employees. Excess revenues after Social Security payouts are transferred to the Treasury in exchange for nonmarketable IOU's from the Treasury.

The increase in the debt for Social Security's trust fund does not appear on the on-budget debt of the U.S. government, i.e., the debt reported by the various government debt clocks. It is off-budget debt. The public is unaware of this.

This cookie jar is expected to be empty in 2017, as the Trustees report. But the recession is creating unemployment. Unemployed people do not pay FICA taxes. So, the 2017 date is optimistic. The cookie jar could be empty as early as 2013, according to Prof. Kent Smetters of the University of Pennsylvania's Wharton School.

Smetters is an expert on the issue of the two programs' trust funds. His 2005 testimony before Congress on the off-budget unfunded liability -- $83 trillion -- is here:

Here is Table 2. Add up the Social Security and Medicare unfunded liabilities. It is about $83 trillion.

The government is running a $1.8 trillion on-budget deficit this year (raiding Social Security's tax surplus). Someone must buy this new debt. Asian central banks -- mainly China's -- are buying far less because the U.S. trade deficit has shrunk by 50% since late 2007. The trade deficit and foreign purchases of U.S. investment assets (mainly U.S. Treasury and U.S. agency debt) are two sides of the same coin. Fewer "coins" are involved these days.

So, who will buy this debt?

At what interest rate?

For how long?

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