Medicare Trust Funding Accounting: Double Your Fiscal Trouble

Anyone who is still uncertain about whether the Obama administration is double counting when it claims that ObamaCare both funds new insurance benefits and extends the life of Medicare should check out video of the Medicare panel held at the American Enterprise Institute earlier this week. Asked about the claim, Medicare's Chief Acturary, Richard Foster, says that he'll try to describe how the relevant revenue and spending process will work and then let people judge for themselves (clip starts around the 1:53 mark). Here's how Foster explains the process:

To use a simplified example, let's say you as an individual have to pay an extra $100 in hospital insurance payroll taxes because of the Affordable Care Act. So an extra $100 in actual cash comes from you to the Treasury and it's credited to the Hospital Insurance Trust Fund. We get a bond of $100 for it. The cash itself is still sitting there and it will be spent like that [makes a motion that indicates "very quickly"]. Money does not sit around long in the Treasury. It may well be spent to help pay for other Affordable Care Act provisions or anything else that it needs to be spent on. So your $100 is spent.

But I have a promise for the Hospital Insurance trust fund that any time I need that money back I can get it. So let's say it was spent for other coverage expansions, and now three years later I need it back to help pay for hospital insurance costs. So I let Treasury know. They come up with $100 in cash plus the five dollars in interest they owe or whatever it might be and they give me that cash and I spend it.

So far we've had a need for $200—$100 for the coverage expansion and $100 for HI [the Hospital Insurance fund]. We spent $200. And I got my money back. But you only paid $100.

When I got my money back, Treasury had to raise that money some other way.  They'd already spent your $100. And they had to raise it by further borrowing, or not spending some other $100, or raising a new tax for $100. So on the one hand, all this is nothing new. This is traditional trust fund accounting. It's just the way it works through the lending and redeeming operation. On the other hand, if you're going to spend $200, you need $200.

It's an accounting methodology, in other words, that allows the government to collect $100, then spend it twice. It's double counting, regardless of how many times Health and Human Services Director Kathleen Sebelius and other Obama administration flacks try to claim otherwise.

The last part of Foster's explanation is also important to note. It's not just that traditional trust fund accounting is inaccurate. It's that, by giving the government license to spend tax money twice, it frequently paves the way for more borrowing, higher taxes, and unplanned service cuts.