Before Thinking About Expanding Medicare, Read the Trustees Reports

The Social Security and Medicare Trustees Reports were finally released on August 31, or almost five months after their scheduled release date of April 1. This year’s release date was the latest since 1967 when the April 1 release date was established. You may think that the delay was due to some surprising development with the programs’ financial positions, but that is not the case.  Compared to last year’s reports, there is nothing shocking, even with incorporating estimates of the impact of COVID-19 on Medicare’s finances.  That said, if you are not familiar with the reports from the last several years, there is much in the current reports that you should find disturbing.

The first troubling fact is that Social Security’s tax revenues have been less than its expenditures for more than a decade.  The second troubling fact is that the Medicare Hospital Insurance (HI) program’s expenditures have exceeded its tax revenues since 2005.  The third is that the situation does not improve in the future. Deficits are forecast for Social Security and for the HI program each year, leading to unfunded obligations for Social Security of $20.9 trillion and $13.5 trillion for the HI program over the next 75 years.

Why don’t the programs’ alarming finances raise more red flags? The annual reporting almost always mentions the projected years when the Social Security and Medicare trust funds will be depleted, and this year’s forecast of the combined Social Security trust fund’s depletion is 2034. The Trustees point out that in 2034, under current law, benefit payments would have to be cut 22% without corrective action.[1]

A depletion date thirteen years from now gives the impression that we have time to solve the problem, and, in a sense, we are already experiencing a passive, ongoing solution to the problem.  To see how, let’s take a look at the trust fund.

The combined Social Security trust fund at the beginning of 2021 had a balance of $2.9 trillion.  This represents the accumulation of Social Security surpluses that resulted from the last major reform of the program in 1983. Through the years, the surpluses were invested in special issue interest bearing government bonds. These bonds are assets to Social Security but are also liabilities of the Treasury.  The Treasury has not invested the surpluses in real assets like private stocks, bonds or real estate that it can sell when necessary.  Rather, the surpluses were used to buy the special issue bonds and at the same time they allowed for higher government spending, lower federal income taxes and other non-payroll taxes, and smaller unified budget deficits. This year, total program expenses will exceed the total of payroll tax revenues plus trust fund interest revenues, thus necessitating the start of the trust fund’s drawdown.

From this trust fund perspective, Social Security has a thirteen-year window.  However, the program has run cash flow deficits since 2010. These deficits have required real general revenue resources to pay benefits to retirees, survivors, and the disabled.  Social Security deficits have only added to the unified budget deficits, and additional borrowing is the net result.  As we get closer to 2034, the required borrowing will continue to grow.  The current solution to Social Security’s cash flow deficits is additional borrowing, made possible by honoring the trust fund bonds. As the trust fund bonds are redeemed, the government is converting them to explicit debt held by the public. The question is, when will Congress feel compelled to act to shore up Social Security’s finances?  Will it continue to borrow as it is now doing, or will Congress either raise additional dedicated revenues, reduce benefits, or both?
Medicare is in a much worse financial position than is Social Security. Now in its sixteenth year of deficit spending, the HI program’s trust fund will be depleted in 2026 – five years from now!  You would think that this would be big news, particularly given recent calls to expand Medicare by adding dental, vision, and hearing coverage, and lowering the eligibility age to 60.  

Sorting through Medicare’s current financial position is not as straightforward as Social Security’s because Medicare has multiple parts that are financed differently. Medicare’s Hospital Insurance program, also referred to as Part A, covers hospital, hospice, skilled nursing, and home health expenditures. This part of the program is funded by payroll taxes and taxes on Social Security benefits, and its trust fund balance at the beginning of 2021 was $134 billion, or about a third of Part A spending in 2020.

Medicare also has the Supplementary Medical Insurance (SMI) Trust Fund that is associated with Parts B and D. These parts are financed by premiums paid by beneficiaries and by general revenues. Part B covers doctors’ visits, outpatient services, and some home health care. Part D covers prescription drugs. Both parts are voluntary, in that beneficiaries must pay a premium of about 25% of the programs’ cost to be enrolled. Technically, these two parts of the program do not have unfunded obligations because the general revenue contributions – federal income tax revenue and other tax revenue -- cover the costs not covered through premiums.

Evaluating the entirety of the Medicare program is best done by comparing the entire program’s projected spending to its projected income. Figure 1 makes this comparison. The figure shows the program’s historical and projected total expenses and revenue sources. As noted, the program’s revenues for Part A come from payroll taxes and taxes on Social Security benefits. Premium revenues from beneficiaries for Parts B and D are the next source of revenues followed by a relatively small portion of revenues from state transfers to Medicare for Medicaid beneficiaries and from fees on manufacturers of brand-name drugs. General revenues were the largest revenue source in 2020 at 46%.  Between 2021 and 2095, the general revenue transfer is expected to grow from 1.79% of GDP to 3.15% based on the current law projection. The deficit shown in the figure is attributable to the Part A portion of the program.


As Figure 1 illustrates, the general revenue transfer is the largest single source of revenues for the Medicare program, and that source of revenues will grow throughout the projection period, given that the general revenues automatically make up about 75% of Parts B’s and D’s growing expenditures. Figure 2 recasts the deficit by setting the general revenue transfer to remain at the 2021 transfer’s share of GDP or 1.79% in all future years.  The difference between the total expenditures and the recast total revenues indicates the financing burden in future years in excess of the program’s dedicated revenues and general revenues set at their 2021 share of GDP. In 2021, this deficit was 0.24% of GDP, by 2050 it will grow to 1.5% of GDP, and by 2095 it will grow to 1.54% of GDP.  To put these percentages of GDP in perspective, total federal tax revenues have averaged 17.3% of GDP over the last 50 years, so another 1.5% of GDP in spending within the next 30 years will require close to a 9% increase in taxes!  And that is just for Medicare.


However, the projected Medicare spending series as depicted in Figures 1 and 2 is an optimistic projection. The spending projection is based on current law and is constrained by restrictions stipulated in the Affordable Care Act. Figure 3 depicts the illustrative alternative expenditure projection published in the Medicare Trustees Report.[2] The premium revenues and state transfers have been estimated to correspond with the higher projected spending. As in Figure 2, the general revenue transfers in 2021 and later are set to their 2021 percent of GDP.

The Medicare Trustees have presented alternative projections for many years and, beginning with the 2012 Trustees Report, the first figure in the report depicts both the current law and the alternative projection. The alternative is necessary because the Affordable Care Act’s (ACA) constraints on spending could actually result in negative margins for health care providers! The Trustees note: “By 2040, simulations suggest that roughly one-third of hospitals and approximately 60 percent of skilled nursing facilities and home health agencies would have negative total facility margins, raising the possibility of access and quality-of-care issues for Medicare beneficiaries.”[3] Past experience with restrictions similar to those in the ACA resulted in Congressional actions to override the restrictions, thereby allowing for continued spending growth.  The Trustees point out that Medicare’s future costs may possibly exceed the current law projections by substantial amounts and that the alternative projection illustrates the potential path of those costs.

Based on the alternative projection, Medicare’s funding requirements in addition to payroll taxes, premium, state transfers and drug fees, and the general revenue transfer fixed at the 2021 percentage of GDP will grow to 1.9% by 2050 to 3.3% by 2095. So, within 30 years, closing the Medicare funding gap will require an 11% increase in all taxes.

For years the Trustees Reports have pointed out that Social Security and Medicare need timely reforms. Medicare’s need for reform is the most critical. Given the impending exhaustion of the HI trust fund and the program’s escalating funding requirements, this is clearly not the time to consider expanding Medicare.

It seems rather cavalier for Congress to continue to discuss grand new spending plans when its current programs are in such a state of financial disrepair.  Future taxes needed to fund Social Security and Medicare at current per-person benefit levels are daunting, to say the least.  Perhaps it would be wise to spend some effort and thought to reforming Social Security and Medicare, considering revenues and expenditures, before embarking on new entitlement programs.   

[1] The “combined’ Old-Age, Survivors, and Disability Insurance (OASDI) program’s trust fund will be depleted in 2034, but the Old-Age and Survivors Insurance (OASI) program’s trust fund will be depleted in 2033 and the Disability Insurance program’s trust fund will be depleted in 2057.
[2] The premium revenues, state transfers and drug fees have been adjusted to correspond with the higher projected spending.
[3] 2021 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, p.201.

Also see Mark Warshawsky, “Where Are the Social Security/Medicare Trustees’ Reports? Real Clear Politics, August 17, 2021, and “Social Security and Medicare – Improved Schedule Management Needed for More Timely Trust Fund Reports” GAO, July 2019 for discussions of Trustees Reports’ publication dates. 

Posted: September 16, 2021 by Dennis W. Jansen, Andrew J. Rettenmaier