The Trust Fund Clock
Part A Depletion and the Arithmetic Driving Every Reform
MCR-00.01 — Series 0: The Structural Baseline#
Medicare Policy Analysis | March 2026#
Every major Medicare policy decision made in 2025 and 2026 traces back to a single structural fact: the program’s largest trust fund is running out of time. Not metaphorically. On the current trajectory, the Hospital Insurance Trust Fund will be depleted in 2033. When that happens, Medicare will be legally prohibited from paying full Part A benefits. Providers will face automatic payment cuts of roughly 11 percent the day it occurs.
How Medicare Is Financed#
Medicare is not a single financial entity. It is three separate funding mechanisms that operate under very different rules, and that asymmetry is where the pressure points are.
Part A, the Hospital Insurance Trust Fund, is the program’s most constrained piece. Funded primarily by a dedicated payroll tax of 2.9 percent of wages, split evenly between employer and employee, with an additional 0.9 percent on earnings above $200,000 for individuals ($250,000 for married couples) under the ACA, the trust fund generated 88 percent of Part A revenue from payroll taxes in 2024. It also receives a portion of the federal income taxes Social Security beneficiaries pay on their benefits, but this is a secondary source. Part A cannot draw on general revenues. If the trust fund depletes and payroll tax income falls short of costs, payments are automatically cut to match available revenues. There is no automatic legislative correction. Congress would have to act.
Parts B and D, the Supplementary Medical Insurance Trust Fund, operate on entirely different logic. Beneficiary premiums are set annually to cover roughly 25 percent of expected program costs, and the federal government automatically contributes the balance from general revenues. The SMI Trust Fund faces no depletion risk because its financing resets each year. The consequence of that design is a different problem: unlimited, automatically growing demands on the federal general fund. Total SMI costs are projected to grow at 8.8 percent annually for Part B and 7.1 percent annually for Part D over the next five years. Every dollar of that growth is either a premium increase on beneficiaries or a larger draw on the federal budget.
Medicare’s solvency debate is primarily a Part A story in public discourse, but the long-term fiscal challenge is an SMI story. Part A depletion is a hard cliff with an automatic trigger. SMI growth is a slow-motion budget pressure with no automatic stop.
The Trust Fund Trajectory#
The 2025 Medicare Trustees Report, released in June 2025, delivered a significant deterioration in the program’s near-term outlook. The HI Trust Fund depletion projection moved up three years, from 2036 in last year’s report to 2033, driven primarily by higher-than-expected 2024 expenditures for hospital services, hospice services, and physician-administered drugs.
The trust fund held $237.5 billion in assets at the start of 2025, representing approximately 53 percent of projected 2025 expenditures, below the Trustees’ threshold for adequate reserves. Surpluses are projected to continue through 2027, after which the fund will begin drawing down assets to cover the gap between payroll tax revenues and program costs.
At depletion in 2033, incoming revenues will cover only 89 percent of scheduled Part A benefits. That shortfall is projected to widen to 86 percent of costs by 2049 before gradually recovering. CMS would have no authority to make up the difference. Beneficiary access to inpatient hospital care, skilled nursing facility care, home health, and hospice would be immediately and automatically affected.
The One Big Beautiful Bill Act, signed July 4, 2025, may have accelerated this timeline by one year to 2032. The OBBBA does not affect Medicare directly, but by eliminating the taxation of Social Security benefits for most recipients, it reduces the revenue that flows indirectly to the HI Trust Fund through Social Security benefit taxation. The actuaries have flagged this as a potential further pull-forward of the depletion date.
Total Medicare spending was $1.122 trillion in 2024, representing 3.8 percent of GDP. The Trustees project Medicare costs as a share of GDP will rise from 3.8 percent to 6.7 percent by 2099, and to 8.8 percent under the Chief Actuary’s alternative scenario, which assumes current-law provider payment controls prove unsustainable and are eventually overridden by Congress, as they have been repeatedly in the past.
The CBO Long-Term Picture#
The Congressional Budget Office’s March 2025 Long-Term Budget Outlook confirms and extends the Trustees’ picture. Federal spending on Medicare, net of premiums and other receipts, will increase from 3.1 percent of GDP in 2025 to 5.2 percent by 2055. Combined with Social Security and interest costs, the fiscal trajectory is one of structural imbalance: outlays rising to 26.6 percent of GDP by 2055 against revenues reaching only 19.3 percent.
Medicare is the single largest contributor to the growth in mandatory spending. Social Security and Medicare together account for more than half of the total increase in federal non-interest spending over the next 30 years. Unlike Social Security, which faces a fixed depletion date with a predictable benefit-cut trigger, Medicare’s SMI growth is open-ended, creating no automatic cut but crowding out every other federal priority continuously.
The Trustees’ alternative scenario assumes the physician payment formula, hospital market basket adjustments, and productivity offsets built into current law will prove unrealistic over time and will be overridden, as they have been. Under that scenario, the HI 75-year actuarial deficit grows from 0.42 percent of payroll to 1.28 percent. Closing that larger gap requires either a 44 percent immediate increase in the standard payroll tax or a 24 percent reduction in expenditures. Neither is available on an emergency basis. Both require years of phasing and preparation.
Why This Clock Drives Everything#
The depletion date matters to Medicare policy in three distinct ways.
The first is the political economy of every payment decision. When CMS pursues mandatory savings-certifiable CMMI models, when it pushes back on the MA risk adjustment practices it views as overpayment, when it proposes near-flat rate increases for 2027, and when it pursues unlinked chart review exclusions that reduce payments by an estimated $7.2 billion, these are not abstract regulatory preferences. They are responses to a program spending more than its dedicated revenue can sustain. Every billion in certified savings is one less billion drawing down the trust fund.
The second is the logic behind CMMI’s mandatory turn. Voluntary models attract plans and providers who expect to benefit and exit when circumstances change. CBO has historically scored voluntary models with savings skepticism precisely because they cannot be certified to reduce net federal spending when selection effects dominate. CBO’s 2023 finding that CMMI had increased net federal spending by $5.4 billion over its first decade was a political earthquake. Mandatory models, which compel participation and eliminate selection bias, are the only models that can generate CBO-scorable savings. The trust fund math is why mandatory is now the dominant design paradigm.
The third is the urgency behind encounter-based risk adjustment reform. The current MA payment system, which the Trustees and MedPAC have repeatedly found results in overpayment relative to what the same beneficiaries would cost in traditional Medicare, is a direct drain on the trust fund. The chart review exclusion proposed in the CY 2027 rate notice and the broader shift toward encounter-based risk adjustment are structural corrections to a payment methodology that has allowed overpayment to persist. These corrections are happening now, in a compressed window, because the clock requires it.
The Reform Menu#
The range of structural options for addressing Medicare’s fiscal imbalance is well understood. None of them is new. What is new is the shrinking timeline for deciding.
Premium support, converting Medicare from a defined-benefit program to a defined-contribution system in which beneficiaries receive a fixed federal payment to apply toward a plan of their choice, has been the Republican reform framework for fifteen years, most prominently associated with the Ryan budget proposals. It shifts cost risk to beneficiaries. It has never received a Senate floor vote.
Means-testing, adding income-related adjustments to Part A benefits similar to the IRMAA surcharges already applied to Parts B and D, is a less politically disruptive incremental option. It affects relatively few beneficiaries while generating modest trust fund savings. The OBBBA context, which eliminates Social Security benefit taxation for most recipients while adding to the trust fund’s structural pressure, makes the means-testing case harder politically.
Eligibility age adjustment, raising the Medicare eligibility age from 65 to 67 to align with Social Security’s full retirement age, has recurred as a proposal for two decades. CBO has scored it as generating trust fund savings while shifting costs to individuals and employers. The policy window for it has narrowed as MA benefit contraction creates visible quality-of-coverage concerns for newly enrolling 65-year-olds.
Global budgets, the AHEAD model’s approach of giving health systems fixed annual budgets for defined populations, create structural incentives to prevent costly hospitalizations rather than to generate them. The extension to Geo AHEAD, with non-provider entities including health plans and technology companies eligible to take geographic risk, represents a significant expansion of the concept. If it generates certified savings at scale, it is the most viable path toward structural cost reduction that does not require direct benefit cuts.
Payroll tax increases, the actuarially clean solution, require a 14 percent increase above the current 2.9 percent rate to eliminate the 75-year HI deficit under current-law projections, and 44 percent under the alternative scenario. No current political alignment supports this.
Pharmaceutical pricing reforms, including the IRA’s drug negotiation authority currently in effect for a first cohort of drugs, the GLOBE and GUARD models targeting Part B and Part D drug spending, and BALANCE’s GLP-1 coverage paired with lifestyle intervention requirements, represent the current administration’s pharmaceutical pricing response to the cost trajectory. Their long-term savings effect on the trust fund depends on manufacturer behavior, legal outcomes, and implementation fidelity.
The Actuary’s Warning#
The Board of Trustees’ language in the 2025 Report is unusually direct: “The projections in this year’s report continue to demonstrate the need for timely and effective action to address Medicare’s remaining financial challenges, including the projected depletion of the HI trust fund, this fund’s long-range financial imbalance, and the rapid growth in Medicare expenditures.”
The American Academy of Actuaries, in its August 2025 issue brief, notes that current-law projections may understate the problem because they assume provider payment controls that have historically been overridden will remain in effect. The alternative scenario is not a worst case. It is a scenario the program’s own actuaries view as at least as likely as the current-law baseline.
Congress has never allowed the HI Trust Fund to deplete. That is a statement about political history, not a guarantee about political futures. The difference between acting in 2026 and acting in 2032 is the difference between gradual, phased adjustment and emergency legislation under fiscal duress. The Trustees put it plainly: “Taking action sooner rather than later will allow consideration of a broader range of solutions and provide more time to phase in changes.” That sentence has appeared in every Trustees’ Report for twenty years. The timeline for acting on it has not.
Every rate notice, every CMMI model, every risk adjustment reform, every benefit design decision, and every state policy choice covered in this series exists in the shadow of that clock.
Related Reading#
MCR-02_01 The 0.09% Shock: What CMS Actually Proposed for 2027 MCR-01_01 The Great CMMI Reset: What Was Cut and Why MCR-04_01 Is MA Still Worth It? The Strategic Recalculation for Insurers MCR-03_01 The One Big Beautiful Bill: What It Does to Medicare and Medicaid