FACT CHECK: Medicare savings will be spent to cover workers and their households

WASHINGTON (AP) — President Barack Obama's health care overhaul law cuts about $500 billion from Medicare in the next 10 years and spends most of that to cover uninsured workers and their families.

Democrats say retirees have nothing to fear because those cuts will help push off Medicare's insolvency until 2029 — a full 12 years from current projections.

"This law doesn't weaken Medicare. It strengthens it and extends its life," Obama said at a Miami fundraiser in April.

Sound too good to be true? Sorting out what the overhaul means for Medicare's finances can be confusing. Federal accounting practices allow the health program for people 65 or older to get a credit — an IOU — for savings that actually will largely get spent to cover younger generations.

Some questions and answers on what's looming as a sensitive issue in the congressional elections this fall:

Q: Can the government use Medicare savings in the health care law to pay for covering the uninsured now — and also apply them to make good on future obligations?

A: No. That would be like spending the same money twice.

The Medicare trust fund for inpatient care will get a credit for savings obtained under the law — a special interest-bearing Treasury security that can't be traded on the open market. But when those IOUs must be cashed in to cover hospital care for baby boomers, the government will have to borrow, raise taxes or cut spending somewhere to make good.

Two agencies that provide nonpartisan advice to lawmakers have reached the same conclusion.

The Congressional Budget Office said the majority of the Medicare savings under the legislation "would be used to pay for other spending and therefore would not enhance the ability of the government to pay for future Medicare benefits." Its analysis came in a March 19 letter to Rep. Paul Ryan of Wisconsin, the top Republican on the House Budget Committee.

Recently, Medicare's own economic forecasters issued a similar verdict in a report to lawmakers that discussed how the overhaul law affects Medicare's trust fund.

"In practice, the improved (Medicare) financing cannot be simultaneously used to finance other federal outlays — such as coverage expansions — and to extend the trust fund, despite the appearance of this result from the respective accounting conventions," said Medicare's Office of the Actuary.

Q: OK, I'm not an actuary. Translation, please?

A: Economist John Palmer, a former Medicare trustee who helped oversee program finances, uses a simple analogy to describe what's happening.

Imagine the government as a family, said Palmer, and Medicare as a student getting ready to go to college. He saves money and puts it in a cookie jar. The parents take the money out of the cookie jar and leave behind an IOU, while spending the money for the family's day-to-day needs.

"When the time comes for the kid to go to college, he is going to cash in the IOUs," said Palmer. "The kid has got a guarantee he is going to get that much money back from the parents, but the family as whole doesn't have any more resources. From the parents' point of view, they've got to make that IOU good, and they have spent the money on something else."

Q: It sounds like a Ponzi scheme. Does that mean seniors will be left high and dry?

A: Palmer says he does not think so.

"It's hard to imagine that the government would actually default on that, rather than decide to raise taxes, or increase the deficit," said the economist, now with the Maxwell School at Syracuse University. "The least palatable option would be to suddenly tell senior citizens, 'I'm sorry, you are not going to get the Medicare that you expected.'"

But make no mistake — closing Medicare's future funding gap will be harder now that some of the easier sources of savings have been tapped to finance the health care bill. Lawmakers may have to face wrenching decisions, such as raising the age of eligibility from 65. And the bill will come due at a time when a nation struggling with higher debt is even less able to pay than it is now.

"We did it for a good cause, which was the expansion of coverage," said Palmer. "But down the road, when further steps have to be taken to close the Medicare deficit, then we will have fewer options available because we've already done some of the easier things."

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