Blahous on Social Security, Medicare in Fiscal Cliff Negotiations

Mercatus Center senior research fellow and public trustee for Medicare and Social Security Charles Blahous on fiscal cliff discussions:

On Social Security: “[T]he statement that Social Security doesn’t add to the deficit is unambiguously false.”

On Medicare: “[T]he best thing these negotiations can do for Medicare is to cut the growth of the ACA’s new health entitlement.”

General

“Our long-run fiscal shortfall is essentially a function of growth in four programs—Medicare, Social Security, Medicaid and the new health entitlement enacted in 2010. Whether budget discussions produce useful results will depend on how much legislators do to address projected cost growth in these four programs.”

Medicare

“Considering the political blood spilled to enact the ACA's ambitious Medicare cost savings, which have yet to take effect, it seems unlikely that deficit negotiations will produce new savings on the order of those already enacted.

"Of more immediate interest is whether the savings are actually used to benefit Medicare financing. To that end, the best thing these negotiations can do for Medicare is to cut the growth of the ACA’s new health entitlement.

"First, the costs of this new entitlement are huge—much greater than the revenue that would be generated by the oft-discussed upper-income tax increase.

“Second, unlike with Social Security and Medicare, no one is yet dependent on the new entitlement program's subsidies, so no current beneficiaries would be harmed by scaling them back.

“Third—and most important for Medicare—the ACA’s substantial Medicare cost constraints are fully absorbed by the ACA’s new entitlement program. In other words, the ACA Medicare savings as currently written don’t help to finance Medicare. They’re used to help fund the new entitlement. Scaling back the new entitlement would both improve our general fiscal position as well as our ability to finance Medicare specifically.

“Fourth, the subsidies need to be scaled back to correct various flawed incentives arising under the ACA that could further increase its long-term cost.”

For additional information, please see Dr. Blahous' comprehensive study, “The Fiscal Consequences of the Affordable Care Act.”

Social Security

“There are two fatal flaws in the argument some have made that Social Security should be left alone because it doesn’t add to the deficit.

"First, Social Security faces a dire threat in its own financing shortfall irrespective of the larger deficit, and it absolutely has to be dealt with promptly for the program’s own sake. Our time for fixing Social Security’s finances is rapidly running out.

"Second, the statement that Social Security doesn’t add to the deficit is unambiguously false.

“Social Security is expected to add roughly $165 billion to the federal deficit in 2012. While total benefit payments are roughly $789 billion, total tax revenue generated by the program is $624 billion. Simply put, the difference between Social Security's incoming tax revenue and outgoing expenditures is its effect on the deficit.”

For additional information, please see Dr. Blahous’ recent study, “The End of Social Security’s Self-Financing: What Does it Portend for Social Security’s Future?”; a recent guide to the 2012 Trustees’ report http://www.economics21.org/commentary/guide-2012-social-security-trustees-report; and a further explanation of this subject by Dr. Blahous, below.

Blahous:

— “It is generally understood that to the extent Social Security is financed with incoming dedicated tax revenues, it does not add to the deficit. This year it’s bringing in $593 billion in payroll taxes and another $30 billion in benefit taxation. That’s a total of $623 billion, or $165 billion less than expenditures. How is this other $165 billion in benefit payments being financed? $112 billion comes from transfers from the general fund. Again, it is unambiguous that these payments clearly add to the deficit; they were financed purely by the issuance of additional federal debt. The remaining $53 billion in benefit payments are being financed via interest payments from the general fund to the Social Security trust funds. These interest payments also add to the deficit because they are not associated with incoming revenue to the US Treasury.”

— “Within academia there has been some debate about the fiscal significance of cash payments of interest to Social Security, with the preponderance of evidence finding that they add to federal deficits. But about the payments financed by general revenue transfers there is not even an issue to debate; they are purely debt-financed. Altogether, Social Security is adding substantially to the deficit this year, to the extent of $165 billion.”