CC&E: In a nutshell, what is the Medicare Trust Fund?
DR. SAVING: Medicare is administered by the Centers for Medicare & Medicaid Services (CMS) through two trust funds, one for Hospital Insurance (HI) or Part A, and one for Supplementary Medical Insurance (SMI) or Part B. Unlike a private trust fund, the Medicare Trust Funds generate no income to the US Treasury. They were created as a means of accounting for program income (Medicare taxes and premiums) and disbursements (benefit payments and administrative costs).
Much like the Social Security system, the Part A program is intended to be self-supporting; that is, the benefits provided by the program should be funded almost entirely from payroll taxes. If the Medicare receipts in Part A are less than Medicare expenditures—as long as there is an accounting entry in the trust fund—the treasury is authorized to pay the deficits Medicare has accrued.
The second trust fund, Part B, is actually a combination of Part B and Part D, the prescription drug benefit. This fund is managed so that annual income (Federal general fund revenue transfers and beneficiary premiums) is always projected to cover the next year's cost. This is achieved by automatically adjusting the monthly premium and the amount the Treasury transfers to the fund. The Treasury is authorized to pay the benefits even if the projected costs were underestimated, so in effect, it's simply an authorization to spend.
CC&E: Will the generation transfer method of financing Medicare withstand the imminent swell in beneficiaries from the Baby Boom generation?
DR. SAVING: In its current form, it will not. At the current rate, within 35 years we will be transferring more than 50% of all federal income tax revenues to Medicare alone. In other words, by 2040, if we continue on our present course, we will have to cut federal spending by more than half or raise taxes to more than two and a half times today's level just to balance the budget. Since that scenario is untenable, Medicare needs to be restructured.
The primary problem in Medicare's fiscal crisis is the generation transfer methodology. It combines the worst incentives on the market side by financing a system that discourages saving for the future. The result is a lower capital stock for the nation. When coupled with the Baby Boom bulge, this method will ultimately cripple Medicare. So, first and foremost, the generational transfer method of financing must be abandoned.
