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Medicare Isn’t Going “Bankrupt”

July 31, 2015 at 1:15 PM

Some politicians continue to claim erroneously that Medicare is running out of money.  House Ways and Means Chairman Paul Ryan asserts that Medicare’s Hospital Insurance (HI) trust fund “will go bankrupt in 2030.”  Presidential candidate and former Florida Governor Jeb Bush says that today’s younger workers are “not going to have anything” from Medicare.  In an updated paper, we set the record straight.

The 2015 report of Medicare’s trustees, released last week, finds that the HI trust fund will remain solvent — that is, able to pay 100 percent of the costs of the hospital insurance coverage that Medicare provides — through 2030.  Even in 2030, when the HI trust fund is projected for exhaustion, incoming payroll taxes and other revenue will still be sufficient to pay 86 percent of Medicare hospital insurance costs.  The share of costs covered by dedicated revenues will fall slowly to 80 percent in 2050 and then rise gradually to 84 percent in 2089.  Policymakers will need to close this shortfall by raising revenues, slowing the growth in costs, or most likely both.  But Medicare’s hospital insurance program will not run out of all financial resources and cease to operate after 2030, as the “bankruptcy” term may suggest.

Health reform, along with other factors, has significantly improved Medicare’s financial outlook, boosting revenues and making the program more efficient.  The trustees now project that the HI trust fund will remain solvent 13 years longer than before health reform was enacted.  And the HI program’s projected 75-year shortfall of 0.68 percent of taxable payroll is much less than the 3.88 percent of payroll that the trustees estimated before health reform.  (See chart.)  This means that Congress could close the projected funding gap by raising the Medicare payroll tax — now 1.45 percent each for employers and employees — to 1.8 percent, or by enacting an equivalent mix of program cuts and tax increases.

The 2030 date doesn’t apply to Medicare coverage for physician and outpatient costs or to the Medicare prescription drug benefit.  These parts of Medicare don’t face insolvency and can’t run short of funds.  They’re financed through the program’s Supplementary Medical Insurance (SMI) trust fund, which consists of two separate accounts — one for Medicare Part B, which pays for physician and other outpatient health services, and one for Part D, which pays for outpatient prescription drugs.  Premiums for Part B and Part D are set each year at levels that cover about 25 percent of costs; general revenues pay the remaining 75 percent. Therefore, SMI cannot go “bankrupt.”