Scott Burns: Read between lines for dark warnings

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Here today, gone tomorrow. Attention to the annual reports from the Social Security and Medicare trustees disappeared overnight. They were released on July 28, and media reports noted the lack of exciting news.

It appears that things are getting better, if you can believe it. (You can’t.) Exhaustion of the Medicare trust fund is now 2030. That’s four years further away than last year. The Social Security trust fund runs out of money in 2033, same as last year. That’s well beyond the attention span of our friends in Washington.

But a more careful reading of these reports carries dark warnings. Our country is heading for the most anticipated and documented bankruptcy in history. Or it is heading for the biggest medical crisis in history.

How can I say this? Easy. The information is updated every year. The trustees lay it out in tedious detail. Just read some of the more obscure parts of these public documents; they are available free to anyone with an Internet connection. You can even get a paper copy by request.

Two appendices in the Medicare Trustees Report discuss the problems we face. Appendix F shows us how trust accounting relates to the federal budget. Appendix C teaches us about cost differences. Laws create one set of costs. Historical experience suggests another.

Appendix F tells us the net surplus in trust accounting for combining Social Security and Medicare is a mere $10.1 billion. This figure includes the $102.8 billion in interest income credited to the Social Security trust fund. The interest credit gave Social Security (OASDI) a $37.6 billion surplus for the year. The $23 billion loss for Medicare hospital insurance (HI) reduced that surplus. So did the $4.6 billion loss for Medicare supplementary medical insurance (SMI). (You can see this for yourself in Table V.F1 on page 227 of the Medicare report.)

Based on these figures, it appears we can take a lot of comfort in that gigantic $2.7 trillion Social Security trust fund. It’s even earning interest at an enviable average interest rate of 3.8 percent.

Unfortunately, we can’t take comfort in those figures.

The problem here is that the Social Security trust fund is only an accounting device. It is a measure created to record the excess employment taxes people have paid over the actual cash cost of the program. It is money that has accumulated since the reforms of 1983.

The trust fund is a collection of IOUs from the U.S. Treasury. It includes accumulated interest. The trust fund tracks excess taxes workers have paid into the most important social program our nation has.

Unfortunately, this isn’t real money. It’s book entry money. It isn’t the actual cash that we pay in employment taxes and income taxes to support the program. Examine how these programs work from a federal budget perspective and the picture changes. Rather than a $10.1 billion surplus, the combined programs have a $366.2 billion net cash loss.

Yes, you read that right. A $366.2 billion loss. Social Security and Medicare are now in direct competition with every other government program. Not 10 or 20 years from now. Today.

The only good news here is that the $366.2 billion loss figure is lower than the $402.7 loss for the year before. But the decline is temporary.

It wasn’t always this way. The trustees provided this information for the first time in 2004. Only 10 years ago, the federal accounting figure was a cash deficit of only $18.5 billion. That’s a rounding error in federal spending. It means the Social Security and Medicare programs, combined, were nearly self-supporting and independent from other government operations. (Trust accounting in the same year showed a surplus of a whopping $163.7 billion.)

Today the loss figure is 20 times larger, $366.2 billion.

Appendix C deals with differences between spending determined by law and actual spending. The difference is enormous. Medicare payments for inpatient hospital stays will decline to 40 percent of private health insurance payments if payments follow law. Page 205 of the Medicare report warns readers to be cautious due to the impact of scheduled “negative payment updates” to doctors.

Footnote 91 notes “secondary effects could include substantially reduced beneficiary access to physicians.” Not to mention “increased use of emergency rooms” and “increases in mortality rates.”

That last item is a polite statistical way of saying “more dead people.”

 

SCOTT BURNS is a principal of Plano-based investment firm AssetBuilder Inc. His e-mail address is scott@scottburns.com.

— Universal Uclick


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