Will Medicare Be There When I Retire (Part 1)?

The question of Medicare sustainability is in tandem with Social Security sustainability.  Both programs are projected to run out of money in the next decade, and both programs need reform.  As complicated as Social Security reform is, Medicare reform is worse because there are more moving parts.

What is Medicare?

Medicare provides healthcare coverage to Americans aged 65 and older, as well as certain younger individuals with disabilities. The program is primarily funded through two trust funds: the Hospital Insurance (HI) trust fund, which pays for inpatient hospital services, and the Supplementary Medical Insurance (SMI) trust fund, which covers outpatient services, prescription drugs, and other types of care.

How is Medicare Funded?

• The HI trust fund provides Medicare Part A coverage (inpatient hospital care). This program is financed mainly through payroll taxes on workers’ earnings.
• The SMI trust fund covers Medicare Part B (physician services and medical supplies) and Part D (prescription drug plan). Financing here comes from general revenues of the U.S. Treasury (income taxes and government debt). The government covers three-quarters of the premium costs for Parts B and D. The balance comes from premiums paid by beneficiaries.

So, what’s the problem?

• Trust Fund Solvency: The HI trust fund, funded by payroll taxes, is projected to be depleted in the coming decades, potentially as early as the 2030s, if current trends continue. Once this fund is exhausted, Medicare would only be able to pay a portion of the benefits—estimated to be around 80%—unless new funding sources are identified, or the program is restructured.
• Long-Term Deficit: The SMI trust fund, funded by income taxes, does not bring in enough to cover the rising costs of care.  The remaining cost is covered by the government resulting in a long-term fiscal imbalance / growing deficit.

Note:  The funding gap for the HI Trust fund (Part A) is dwarfed by the increasing deficit for the SMI trust fund (Parts B and D).  Focusing solely on the solvency of the HI trust fund misses the more significant funding challenge.

Why is this happening now?

• • Demographic Changes (Aging Population): As the Baby Boomer generation ages, a large portion of the U.S. population is becoming eligible for Medicare. This increases the number of beneficiaries and the overall demand for services. At the same time, there are fewer working-age individuals contributing to Medicare through payroll taxes, which creates a strain on the system’s finances.
  • Rising Healthcare Costs: The cost of healthcare, including hospital services, prescription drugs, and medical technologies, continues to rise. Medicare’s ability to keep pace with these increasing costs is a growing concern, especially as the number of beneficiaries grows.
  • Political Challenges: Addressing the Medicare funding crisis involves politically sensitive decisions, including changes to taxes, benefits, eligibility age, and other aspects of the program. These discussions are complicated by political polarization, making it challenging to implement long-term solutions.

In our next article, “Will Medicare be there when I retire (Part 2)?”, we will outline some proposals currently being discussed to address the Medicare sustainability challenge.