Medicare Insolvency

June 2018

Medicare’s financial woes may be even worse than previously thought.

The 2018 Medicare Trustees Report, released in early June, revealed the Medicare Part A trust fund is projected to become insolvent in 2026. The 2017 report had forecasted the trust fund to run out in 2029.

Part A of Medicare provides hospital insurance and is funded largely by payroll taxes. The point at which the trust fund becomes insolvent is when it can no longer fully cover inpatient medical bills. The trust fund is projected to be able to pay 91 percent of covered benefits beginning in 2026.1

At the end of 2017, there were $202 billion in the Part A trust fund, which represented just 68 percent of 2017 expenditures. For context, the Social Security trust fund maintains reserves equal to around 290 percent of its annual expenditures and is projected to run out by the year 2034.2 The projected insolvency date for Social Security did not change from the 2017 report.

The health of Medicare Part B, Part C and Part D is not as much of a concern, as those programs are funded largely by the premiums of their beneficiaries.

Why is Medicare Part A facing insolvency?

There are two big reasons for the Part A financial crunch.

  • First, Americans are living longer lives. This means Medicare beneficiaries are drawing benefits for a greater number of years than in previous generations.
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  • Second, the Baby Boomer generation is aging into retirement and flooding the over-65 demographic with a population size never before seen. Around 58 million Americans received Medicare benefits in 2017, more than 49 million of which were over the age of 65.3

The result of these two factors is that there eventually may not be enough workers paying Medicare taxes to support the current population of beneficiaries.

The reason for the three-year discrepancy between the 2017 and 2018 reports is a combination of lower-than-expected hospital insurance combined with higher-than-expected program spending.

Medicare Part A contributions are projected to be lower than previously thought because of lower payroll taxes, lower projected gross domestic product growth and lower income from taxable Social Security benefits. Meanwhile, recent legislation has increased hospital spending.

Potential solutions to save Medicare Part A

One possible solution is to increase the Medicare payroll tax, which currently stands at 1.45 percent each for employees and employers (for a total of 2.9 percent). Another potential solution is to increase the eligibility age for Medicare, which is currently 65. A third — and perhaps less desirable — solution is to make cuts to the benefits themselves.

By law, President Donald Trump’s administration is required to issue a plan to Congress in 2019 to address the problem. 

While the financial future of Medicare Part A may not look bright, history is on its side. Congress has never allowed the Medicare trust fund to go bankrupt, and the program came within two years of insolvency in the early 1970s before being rescued. 

In annual reports between 1970 and 1997, Medicare’s projected insolvency came in at fewer than 10 years a total of 11 times. But the 2018 report marks only the second time since 1997 that the insolvency date has been projected at fewer than 10 years (the only other time being in 2009, when insolvency was projected at eight years following the recession).4

 

 

1 The Boards of Trustees, Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds. 2018 Annual Report. Retrieved from https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/ReportsTrustFunds/Downloads/TR2018.pdf.
2 Frankel, Matthew. (June 10, 2018). Medicare Is in Even Worse Shape Than We Thought. The Motley Fool. Retrieved from https://www.fool.com/retirement/2018/06/10/medicare-could-be-in-even-worse-shape-than-we-thou.aspx.
3 Alliance for Retired Americans. (Feb. 6, 2017). 2017 Social Security and Medicare Factsheet. Retrieved from https://retiredamericans.org/2017-social-security-medicare-factsheet.
4 Davis, Patricia. (Aug. 16, 2017). Medicare: Insolvency Projections. Congressional Research Service. Retrieved from https://fas.org/sgp/crs/misc/RS20946.pdf.

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