Social Security ‘Surplus’ Is Really a Shell Game : Cap Medicare Outlays to Build Reserves, Rather Than Sapping General Tax Funds

At a time when the overall government budget remains in terrible deficit, the Social Security programs appear to be running a $50-billion annual surplus. Running surpluses to accumulate reserves in the Social Security trust funds is part of a plan to prepare for the surge of benefits that will begin 25 years from now when the baby-boom generation reaches retirement age. Without substantial reserves, the payroll-tax rate would have to jump substantially from the current 15% combined rate on employers and employees to meet the increased obligations.

Unfortunately, most of the so-called surplus that currently appears in the Social Security accounts is simply the result of a subsidy from general tax revenue. This year the Treasury will transfer about $30 billion of general funds into the Social Security trust funds, thereby accounting for 60% of the officially recorded Social Security “surplus.�

The subsidy to the Social Security trust accounts has two parts. The first is the result of the 1983 legislation specifying that half of Social Security benefits are subject to income tax for single taxpayers whose incomes exceed $25,000 and married taxpayers with incomes over $32,000. Although the basic rationale for this taxation is that Social Security income should be taxed like other personal income, a political compromise required that the extra tax revenue be transferred to the Social Security trust fund. This transfer will grow from about $4 billion in 1988 to $5 billion a year in 1991.

The second and much larger subsidy applies to the Medicare part of the trust fund. Hospital insurance under Medicare is automatically provided, and is funded primarily by Social Security payroll-tax collections. The supplemental medical-insurance part of the Medicare program, which pays for physicians’ services and outpatient visits, is voluntary, but virtually all retirees participate. The original Medicare legislation called for the premiums paid by retirees to pay half the cost, with the remainder coming from general revenue. But now the premium portion has declined to only one-fourth of this year’s $35-billion cost, with the rest from general revenue.

The transfer of general revenue to the Social Security trust funds does nothing to change the overall government deficit. But reducing the budget deficit and achieving an appropriate accumulation of Social Security reserves will be politically easier if the trust funds are kept separate from the general-revenue accounts. That’s why Congress voted in 1983 to back up its plan to accumulate Social Security trust funds with a change in accounting that officially took Social Security “off budget.�

To achieve a clear line between the Social Security trust funds and the “on budget� general-revenue accounts, the subsidy from general revenue to the Social Security accounts should be eliminated. The Social Security program should learn to live within its own capability and accumulate honest-to-goodness reserves that will make it possible to finance future retirement benefits without a dramatic increase in payroll-tax rates. If general revenue were not being transferred into the Social Security accounts, the “on budget� deficit would be cut by $44 billion in 1991.

Eliminating the general-revenue subsidy would cut in half the projected 1991 “surplus� in the Social Security accounts. To get the Social Security reserves back on track and growing at the appropriate rate would require an increase in the income of the Social Security accounts or a reduction in outlays or both.

Among revenue-increasing changes, one possibility would be to raise the Social Security payroll tax from 15% to 16.5%. But even today’s rate is an onerous burden on many working families.

A one-time six-month skipping of the automatic inflation adjustment of benefits would be a relatively painless way to offset the loss of the $5-billion transfer from income taxes to Social Security trust funds.

A natural way to offset the reduced subsidy to the Medicare part of the trust fund would be to raise the individual premiums back to the 50% share of total supplemental medical-insurance costs that was called for when Medicare was established. Medicaid could continue to pay premiums for low-income aged.

But the key to the financial soundness of the Medicare program lies in slowing the overall growth of Medicare outlays. Medicare spending is now running at $87 billion a year, and is projected to jump 70% over the next five years. One way of slowing that growth would be to cap the increase in total payments to physicians. Limiting the growth of such payments to the rate of increase of the gross national product would save $9 billion a year by 1993.

All possible approaches to keeping the Medicare and Social Security programs on a sound financial basis deserve careful analysis and full public debate. But there is no virtue in adding to the “on budget� deficit in order to create the appearance that the Social Security reserves are growing at an appropriate rate.