Democrats are sure to respond with their own proposal, most likely a prescription drug plan without any real reform of Medicare. The argument over which plan is better will inevitably include rhetoric about the projected cost of the proposals.

From there, it’s just a short jump to a discussion of the Medicare “trust fund” and the program’s projected date of “insolvency.” The trust fund has existed as an accounting mechanism to measure the cumulative surpluses of income over expenses for Part A of the program.

The significance of the trust fund is that… actually, it has no significance whatsoever. The reason for its utter meaninglessness starts with the contents of the trust fund.

Any surplus of revenue over expenses in Part A is used to pay other expenses, and instead, Treasury notes are deposited into the trust fund. These are “specially marked” Treasury notes to distinguish them from other Treasury notes. But all Treasury notes, no matter how they are marked, represent an obligation for taxpayers to repay them with future taxes. Normally, Treasury notes are held by individuals, corporations or foreign governments who can claim them as real assets, but the special Treasury notes are held by the U.S. government itself as a claim on general tax revenues to pay for Medicare.

Medicare is almost entirely financed through four major sources of revenue: (1) a monthly premium paid by beneficiaries (covering 9.3 percent of total Medicare expenses in 2000); (2) a payroll tax on all wages and salaries (65.1 percent); (3) a tax on Social Security benefits (4.0 percent); and (4) general tax revenues (20.6 percent). Although revenues from the payroll tax and the Social Security benefit tax are assigned to Part A and revenues from beneficiaries’ premiums are assigned to Part B, those assignments are also meaningless.

According to actuarial projections from the Medicare Board of Trustees’ annual report, a major shift will occur in the revenue percentages above. The number of workers per Medicare beneficiary will decline from 4.0 in 2000 to 2.3 in 2030. As a result, payroll tax revenue will decrease as a percentage of Medicare expenses and the percentage of general tax revenues needed will increase.

Now comes the revelation: If the entire Medicare trust fund suddenly vanished into thin air, nothing would change. In other words, the trust fund is simply a mechanism for showing that general tax revenues will be required to pay for future Medicare expenses. As such, it’s perfectly useless.

The belief in the significance of the trust fund and, hence, a date when Medicare will become insolvent rests on the false notion that the federal government will stop paying for Medicare expenses in the future merely because all the general tax revenues needed to pay for them are not accounted for in the trust fund. Such a notion is ludicrous. The money to pay for Medicare expenses will be found. The only question is whether future governments will run large budget deficits or raise taxes.

A big part of the Medicare debate has already been lost to inane discussions about the trust fund and Medicare’s projected date of insolvency. This supposed insolvency date was pushed back by the Balanced Budget Act of 1997, which shifted home health care costs from Part A to Part B of the program. But this was merely an accounting gimmick, as false as the trust fund itself.

Taxpayers are firmly on the hook for Medicare, a program whose “defined benefit” method of delivering health services is increasingly under question. Let’s hope the 2002 debate over Medicare’s future doesn’t mirror the ridiculous Social Security “lockbox” hyperbole of the 2000 presidential campaign. The Medicare debate is too important to engage in fairy tales.

Chris Middleton is the Senior Health and Tax Policy Analyst for the Center For Entrepeneurship of the Pacific Research Institute in San Francisco. He can be reached via email at cmiddleton@pacificresearch.org.