If you knew a financial reckoning were due in 30 years, would you freak out? Probably not—heck, you might be dead by then. Twenty years? Nah, not really.
What about eight years from now? That might get your attention. And that’s where we stand with Medicare, the giant health care program for those 65 and over.
The latest annual assessment of the financial health of the Medicare and Social Security programs finds that the main reserve fund that helps finance Medicare will run dry by 2026. That’s three years sooner than the government predicted last year.
The hospital insurance trust fund, as it’s called, helps cover the cost of Medicare Part A, which includes hospital visits, home health services, nursing facilities and hospice care. The insolvency of the fund doesn’t mean Medicare will go broke. It means there will be no money in reserve, leaving only current tax inflows to cover Medicare’s costs. In 2026, those tax revenues will cover 91% of the costs for Medicare Part A, according to the program’s trustees. The portion of costs covered by tax revenues will fall to 78% by 2039, and then improve gradually.
As Medicare runs short of money to pay its bills, it will probably reduce payments to providers. Some might absorb the hit; others might stop accepting Medicare patients. “It’s a very sad situation,” says Marc Goldwein of the Committee for a Responsible Federal Budget, a nonprofit group that monitors fiscal policy. “No one wants to talk seriously about Medicare. It seems like we’re in a really bad place, and I don’t see how we get to a better place.”
The situation could become more dire if there’s a recession during the next eight years—which is probably likely, given that the economy is now in one of the longest expansions in US history. The forecast for 2026 is based on average GDP growth rates of about 2.5% per year. But growth typically turns negative during a recession, and tax revenues almost always drop, which would leave even less money coming in to cover Medicare expenses, depleting the reserve fund sooner than 2026.
And all of this occurs as overall federal debt, now more than $21 trillion, marches ever higher, leaving less and less wiggle room for Washington to borrow in an emergency, since it already borrows so much on an everyday basis. If the government began borrowing to pay for the shortfall in retirement programs, it would make a possible debt crisis more likely.
There’s one other Medicare trust fund, which helps cover costs for Part B and Part D, including some doctors’ visits, outpatient services and prescription drug insurance. That pool of money, called the supplemental medical insurance (SMI) trust fund, is in better shape and expected to remain solvent. But that’s because it’s allowed to draw on general federal revenue, which would leave less for other spending if those Medicare costs continue to rise as expected. The SMI trust fund also gets money from premiums paid by enrollees.
Social Security’s slow-motion fiscal disaster
Social Security has a slightly longer lifeline, but that program is in trouble, too. The government estimates two trust funds that finance Social Security will run out of money in 2034, which is the same as its estimate last year. Once the trust funds are gone, Social Security, like Medicare, will still be able to offer some benefits, based on Social Security tax revenue the government takes in. Once the reserve fund is gone, the program will be able to pay about 75% of owed benefits.
This slow-motion fiscal disaster has been well understood for a long time, and there are many proposed fixes. The Social Security tax rate is now 12.4%, split evenly between workers and employers. The Medicare tax rate is 2.9%, also split evenly. Simply raising the tax rate would be one straightforward way to bring more money into the programs.
The Medicare tax applies to all income, but the Social Security tax only applies to the first $128,400 of income. Raising that limit or eliminating it altogether would be another way to bring in more Social Security funds.
Benefit cutbacks are another way to stabilize the programs, financially. Benefits could be capped or eliminated for wealthy retirees who don’t really need Social Security. The retirement age at which benefits become available could be raised more aggressively. Annual cost-of-living increases could be reduced. Coherent reform of the two retiree programs would probably include a sensible mix of tax hikes and benefit reductions.
But waiting to solve the problem makes the problem worse and raises the cost of fixing them. One way to make Social Security solvent today, for example, is to raise the tax that funds the program by 2.2 percentage points, according to the Center for a Responsible Federal Budget. But waiting until 2034 to address the problem would require raising the tax rate by 3.9 points. The same math applies to benefit reductions. Cutting benefits today by 17% across the board would make Social Security solvent. But waiting until 2034 would require a 23% cut in benefits.
Who’s to blame?
If you want to know who to blame for these programs’ crumbling finances—Trump or Obama, Republicans or Democrats—the answer is all of the above. Politicians today simply aren’t willing to vote for legislation that would impose a cost on voters—whether it’s higher taxes or benefit cuts—even it’s the logical thing to do. Voters, for their part, have gotten used to more in services from the government than they for pay in taxes, thanks to Washington’s ability to borrow indefinitely. Meanwhile, the ineluctable drift of the baby boomers into retirement guarantees a cost explosion in “entitlement” programs originally meant as a backstop.
If a crisis arrives, it might represent a real possibility to correct these giant imbalances. “One of the ongoing problems with the debt is people don’t want to solve it outside of a crisis,” Goldwein says. “A crisis would be horrible, but if Medicare is about to run out of money, it might help. Having a forcing mechanism could help with overall fiscal picture.” Still, stay as healthy as you can, just in case.
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Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman