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June 2018 Budget Commentary

We have written several times on the so-called Social Security Trust Fund, about its nature as an accounting gimmick, and about the ideology that surrounds it.  Suffice it to say, that whatever shortfall Social Security is projected to run in the years ahead, it pales in comparison with the deficit produced by the rest of the federal budget.  In fact, some modest transfers from the Treasury (or even credited interest adjustments) would make the SSTF solvent well into the future.

 The same cannot be said of Medicare.  The SSTF can be said to make sense as an accounting entry designed to “keep score” of the surplus contributions made by American workers—but Medicare is a much different story.  First of all, only Medicare Part A is funded primarily by a dedicated tax—that’s where all of the Medicare taxes on your paycheck go (Medicare has three coverage areas, Part A for hospitalization, Part B for out-patient services, and Part D for prescription drugs).    The lion’s share of funding for both Part B and D comes not from a specific tax but rather from the general Treasury account—that is, regular taxes (or deficit spending).  In this sense, the “trust funds” for Medicare Part B and D are insolvent and would run out of money in the next six months if Congress didn’t keep appropriating transfers for them.

As the 2018 Medicare Trustees Annual Report puts it, “The Part B and Part D accounts in the SMI trust fund are expected to be adequately financed because premium income and general revenue income are reset each year to cover expected costs.” (pg. 9, 2018 Medicare Trustees Annual Report).  That’s government-speak for “we plan to take as much money as we need each year from the general Treasury account to cover the costs (minus premiums—which fund about a quarter of the programs).”  In other words, funding for Parts B and D is not going to be cut because their “trust funds ran out of money” or because the government is running a trillion dollar deficit.

At this point it should be obvious how misleading and hypocritical the pontification and hand-wringing about Social Security and Medicare “insolvency” is.  There is no reason why the federal government cannot simply fund whatever shortfall arises in Social Security or Medicare Part A in the same manner that it pays for Medicare Parts B and D, federal salaries and pensions, defense spending, Homeland Security, national parks, interest on the national debt, or anything else it spends money on.  Nothing else in the federal budget is cash flow positive, as Social Security has been since 1984, or roughly cash flow neutral, as Medicare Part A has been since 1970.  What rationale exists for breaking promises to Americans regarding their retirement security simply because these programs are predicted to be slightly cash flow negative at some point in the future?  If an annual deficit of a trillion dollars right now isn’t a problem, why worry about a few billion dollar shortfall for Social Security and Medicare Part A in ten years? 

There is a saying that no good deed goes unpunished.  Social Security and Medicare Part A are stigmatized because of the fact that they have been the most fiscally sound parts of the budget for many years.  The pundits who bemoan the finances of these programs remind us of parents who ignore the bad behavior of their own children while taking others to task for the slightest failings. 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.  All performance referenced is historical and is no guarantee of future results.  

Securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor. Great Valley Advisor Group and Doylestown Wealth Management, Inc. are separate entities from LPL Financial.

 

The Part B and Part D accounts in the SMI trust fund are expected to be adequately financed because premium income and general revenue income are reset each year to cover expected costs

  1. 9, 2018 Medicare Trustees Annual Report