Crunch time for Medicare is just five years away, according to the latest annual report from the trustees who oversee the program. The trustees say the popular health care program for seniors will begin to run short of money in 2026, the same doom date as in last year's report. The COVID pandemic and its effect on the economy represent an "unprecedented level of uncertainty," however, and the funding shortfall could arrive sooner, the report found.
Social Security is in slightly better shape, with enough funding to stay solvent through 2033. But that's one year sooner than last year's forecast.
Since the Medicare funding crunch will arrive first, that will test how Congress deals with existential risks to vital elements of the nation's social safety net. But it's not a terribly complicated problem and experts have seen it coming for years. There are many plans for fixing Medicare. What’s missing are elected officials willing to tackle the unhappy job of raising taxes or trimming benefits to fix Medicare’s finances. Even President Joe Biden, who’s asking Congress for a huge boost in safety-net programs, hasn’t proposed a stabilization plan for Medicare.
Seniors would revolt if Congress doesn't keep Medicare intact
If Medicare becomes “insolvent” and Congress does nothing about it, that doesn’t mean the program would stop paying benefits. It means Medicare would pay less than 100% of benefits. The main funding mechanisms for Medicare are a 2.9% payroll tax, general revenue from the Treasury Department, income tax on Social Security benefits and premiums paid by enrollees. Money from the 2.9% payroll tax goes into a “trust fund” that can’t be used to pay for anything else. In the past, the payroll tax generated more money than Medicare spent, leaving a surplus that helped pay for future benefits. But costs have exceeded dedicated funding for most of the last 13 years, as medical costs rise disproportionately, the population ages, more Americans join Medicare, and people live longer.
That surplus in the trust fund will be gone by 2026, the latest report predicts. But the funding sources will still be generating revenue — just not enough to cover all expenses. The trustees estimate that Medicare would still be able to cover 91% of its hospital obligations in the first year after the surplus dries up. That percentage would then decline as the gap between Medicare’s revenue and its obligations widened.
The odds Congress will let this happen, however, are narrower than a cardiac stent. Seniors — the most reliable voting bloc — would revolt. The medical industry would pressure Congress and start warning patients that Uncle Sam is blocking lifesaving care. The press would play its amplifying role by highlighting all the tragedies likely to unfold if Congress doesn’t keep Medicare fully intact.
Congress has fixed Medicare before, though in slapdash, temporary ways that hint what Congress is likely to do this time around. “I can easily see this being papered over without dealing with the financing and spending of those programs,” Douglas Holtz-Eakin of the American Action Forum, a former director of the Congressional Budget Office, told Yahoo Finance last year. “There's no appetite for reforming the spending. And there's no appetite for a big tax increase. So, I think the odds are bigger for some sort of gimmick.”
That gimmick would most likely be the transfer of more general revenue — ordinary taxpayer dollars — to Medicare. There are three main parts to Medicare: hospital expenses (Part A), doctor visits and outpatient expenses (Part B) and prescription drug coverage (Part D). The financial drama mostly involves Part A, which gets 88% of its funding from the payroll tax devoted to Medicare financing. The law doesn’t allow the Treasury Department to use general revenue for Part A, so Congress would have to change the law. Or, Treasury could move money around in creative ways that resolve the problem in some technical fashion. The Part A trust fund has never run out of money before, so there’s no template for what would happen.
About 70% of the funding for Part B and Part D already comes from general tax revenue, so those parts of Medicare would remain fully funded. That’s a big budgetary problem, since the government’s medical costs are rising far faster than overall revenue, and health care programs account for a mushrooming portion of all spending. At some point all that deficit spending could become unaffordable or tank the economy. But leaders of both parties have been whistling past that ticking time bomb for years now, and they’re not likely to do anything about gargantuan budget deficits until there’s a crisis.
There are many ways to fix Medicare
If Congress wanted to fix Medicare’s financing for good, there are many ways to do it. The nonprofit Committee for a Responsible Federal Budget lists 10 ways to stabilize the Medicare trust fund. The most straightforward would be raising the 2.9% payroll tax to 3.4%. Other tax hikes would do the trick, as well. Or there could be a combination of modest tax hikes, benefit reforms, and lower payments to health care providers.
The nonprofit Bipartisan Policy Center (BPC) offers five sets of policy options that would fix Medicare’s finances. Possible changes include raising the Medicare eligibility age, requiring more cost-sharing for new enrollees, imposing new taxes on high-income households, cutting provider payments, and raising the payroll tax rate. BPC points out that delaying such solutions would leave outdated or inefficient processes in place and raise the ultimate cost of saving Medicare, in some cases by hundreds of billions of dollars.
A last-minute, highest-possible-cost solution is nevertheless the most likely outcome. Congress is considering lowering the Medicare eligibility age rather than raising it, and adding new benefits such as dental, hearing, and vision care. President Biden has foresworn any tax hikes on households earning less than $400,000, which pre-empts a payroll tax hike for most people. Biden and his fellow Democrats are willing to raise taxes on businesses and the wealthy, but probably not by enough to pay for all the new programs they favor. Medicare will muddle through, but probably remain financially vulnerable — on paper — for years or even generations to come. Get used to it.
Rick Newman is the author of four books, including "Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman. You can also send confidential tips, and click here to get Rick’s stories by email.
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