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An Overdue Budget Reform: Prohibit Double-Counting of Medicare Savings

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An Overdue Budget Reform: Prohibit Double-Counting of Medicare Savings

September 20, 2015

Key members of Congress, notably the chairs of the budget committees, have recently signaled interest in reforming a “broken” federal budget process. These efforts are drawing upon an impressive array of outside expertise, including the Mercatus Center’s David Primo as well as bipartisan teams assembled by the Committee for a Responsible Federal Budget (CRFB) and the Bipartisan Policy Center.

There is no shortage of ideas on how to improve the federal budget process; it is difficult to get bipartisan agreement on most of them. Some believe budget rules should be easier to execute, to increase the chances lawmakers will abide by them. Others believe rules should be toughened, to force lawmakers to make difficult choices they currently avoid. Inevitably, advocates tend to favor budget rules they believe are more likely to lead to their preferred fiscal policy outcomes, and of course such views are all over the map.

Some reforms, however, might be especially worthwhile insofar as they would simply make it more likely that budget results conform to lawmakers’ manifest intent. This piece will describe one such concept. In essence, it would prohibit future double-counting of Medicare Hospital Insurance (HI) savings, to ensure that future fiscal outcomes are consistent with the longstanding intent that both Social Security and Medicare HI be operated as self-financing programs.

There is currently an enormously expensive loophole in the budget rules. By law, Social Security and Medicare HI are only permitted to spend when there are positive balances in their respective trust funds. They must constrain benefit spending if trust fund reserves are depleted. Despite this restriction of law, current scorekeeping rules instead assume the law governing these programs will be changed to permit full payment of all scheduled benefits irrespective of trust fund spending authority. This results in a scorekeeping baseline assuming much higher spending than permitted under current law. 

This scorekeeping practice creates huge opportunities for budgetary mischief. It means that some legislation increasing Social Security or Medicare HI spending authority is not scored as adding to the deficit, whereas legislation that simply implements prior-law spending constraints is scored as producing “savings” that can then be spent on other new programs – again, without lawmakers being charged for the new spending.

This loophole was at the heart of the problematic scoring issue I highlighted in my 2012 study, “The Fiscal Consequences of the Affordable Care Act.” Relative to the scorekeeping baseline, the ACA was found to reduce projected deficits even though, relative to actual prior law, the ACA had clearly increased them. This was so poorly understood that the analysis was initially controversial with some commenters unfamiliar with the scorekeeping rules. But since its publication, the basic factual point has been substantiated in countless places, including by CBO, CRFB, and most recently in a Henry Aaron column in Fortune. 

Here’s how I described the scoring issue in a subsequent article:

“Social Security and Medicare are financed under law from special trust funds and are only permitted to pay benefits to the extent they have resources in those trust funds. The scorekeeping conventions currently in use ignore these constraints. They instead implicitly assume that all financing discipline imposed by the trust funds under current law will be overridden by future Congresses.”

Aaron’s more recent article describes current law in very similar terms:

“Social Security (OASDI) and Medicare Hospital Insurance (HI) expenditures are certain to exceed revenues earmarked to pay for them. Both are financed through trust funds. Both funds have sizeable reserves — government securities — that can be used to cover short falls for a while. But when those reserves are exhausted, expenditures cannot exceed current revenues. . . Nonetheless, CBO and other organizations assume that Social Security and Medicare Hospital Insurance can and will spend money they don’t have and that current law bars them from spending.”

CRFB has suggested closing this loophole as part of budget reform:

“Prohibit double-counting of increased revenues and spending cuts involving trust funds. . . . The treatment of spending for programs funded through trust funds should be modified to reflect the limits on the amount of spending allowed under the law when trust fund assets are depleted. This change would mean that legislation increasing trust fund balances through general revenue transfers or increases in dedicated revenues would be scored with a cost for the increased spending, and legislation reducing trust fund spending would not be scored with savings that could be used to offset costs elsewhere in the budget.”

Why is this a big deal? It’s a big deal because, although the intent behind the trust funds is to confine Social Security and Medicare spending authority within defined parameters, no scorekeeping penalty is applied to allowing them to spend beyond these constraints and adding that spending to the deficit. This opens the door to a whole array of budget gimmicks potentially involving trillions of dollars, including:

1) Legislation facilitating additional entitlement deficit-spending via the issuance of new debt from the general fund to the trust funds (this was actually done in 2011-12 in combination with a temporary Social Security payroll tax cut).

2) Legislation complying with pre-existing constraints on trust fund spending, but counting such implementation as “new savings” free to be spent on new programs (this was done in the ACA).

Thus, although strict adherence to current-law restrictions on Social Security and Medicare spending would produce much better fiscal outcomes than shown in the current scorekeeping baseline, existing scoring rules permit this budget discipline to be waived without disclosing the resulting additions to deficits. If the budgetary maneuvers recently employed in the ACA and the Social Security payroll tax cut were repeated and became routine, the fiscal result would not be the benign one referred to in Aaron’s Fortune article, but the disastrous one projected under the CBO baseline. 

Closing this loophole would not only improve fiscal outcomes, it would be more consistent with legislative intent that Social Security and Medicare HI be self-financing to a meaningful extent. It would also fix several other problems I describe elsewhere in greater length than can be done here.

It is important to understand that both the current scorekeeping baseline as well as a true-law baseline have advantages and disadvantages. Thus it would probably be imprudent to completely replace the current scorekeeping conventions with others based solely on the literal application of Social Security and Medicare law. 

It is not necessary to wholly abandon the current baseline, however, to dramatically improve the budget process. It would be a great improvement if CBO were simply directed to evaluate legislation by two yardsticks: whether it would worsen federal deficits relative to 1) the current baseline convention, or to 2) current-law restrictions on spending beyond Social Security and Medicare trust fund resources. The budget process could erect points of order against increasing deficits by either measure.

Had these protections been in place in recent years, fiscally responsible lawmakers could have used them to block costly budget gimmicks that have added enormously to current and projected federal debt. But the real danger lies ahead; it would be very hazardous to leave this budget loophole in place given the enormous fiscal challenges over the horizon.

 

Charles Blahous is a senior research fellow for the Mercatus Center, a research fellow for the Hoover Institution, a public trustee for Social Security and Medicare, and a contributor to e21.

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