Ask the Advisor: February 2022

Q: Has Congress Fixed Medicare Solvency Problems Yet?

It seems that we haven’t heard anything about whether Congress will take action to fix Medicare’s insolvency issues.  Is this correct? 

A:  You haven’t missed anything, but we might all miss Medicare hospital coverage in as little as three years if Congress doesn’t get to work on it immediately!  So far as we have been able to learn, Congress has not yet considered legislative provisions that would strengthen Medicare Part A financing.

Medicare does have a solvency problem.  Medicare Trustees projected last year that the Hospital Insurance Trust Fund — Medicare Part A —would become insolvent by 2026.  But since the federal government’s 2026 fiscal year actually starts on October 1, 2025, that puts us only three years away from Part A insolvency.

Unlike Medicare Part B (which pays for doctors and outpatient services) or Part D (prescription drug coverage), which are funded in part by premiums and in part from general federal revenues, the Part A Trust Fund receives almost all of its funding through payroll tax deductions from earnings.  The 1.45% tax, which is matched by employers for a total of 2.9%, is deducted from all wages earned.  There is no taxable maximum cap as there is for Social Security.  In addition, high earners with incomes of $200,000 and up (individuals) or married couples with incomes of $250,000 and up, are subject to an additional 0.9% Medicare tax on earnings in excess of the threshold amount.

The Medicare Trustees however, say that for the Part A Trust Fund to remain solvent, the payroll tax rate would need to increase from 2.9% to 3.7%, or benefits would need to be reduced immediately by 16 percent.

We reported on one other potential source of funding last year, a 3.8% “Medicare” tax on net investment income that was signed into law shortly after passage of the 2010 Affordable Care Act.  At the time of enactment, this tax was widely referred to as a “Medicare” tax in the media, by tax and investment professionals, and many lawmakers sold it to the public that way.  But the truth is those revenues, which the Joint Committee on Taxation (JCT) estimates to be $27.5 billion for 2021, never actually made it into the Medicare Part A Trust Fund.  It wound up going straight into the U.S. General Fund instead, where it could be appropriated for any government spending.

According to the Federal Register, “Amounts collected under section 1411 are not designated for the Medicare Trust Fund.  The Joint Committee on Taxation in 2011 stated that’s because no provision is made for the transfer of the tax imposed by this provision from the General Fund of the United States Treasury to any Trust Fund.”

By setting up revenues so that they would flow to the General Fund, Congress by-passed earmarking those revenues for Medicare Part A or Part B Trust Fund.  That means when the funds are used for other government spending, the Medicare Trust Funds are not earning any interest from the federal government for the use of those funds.

TSCL advocates for legislation that makes affordability for Medicare beneficiaries a top priority. Medicare healthcare costs are the fastest growing cost that retired households face, and beneficiaries are already near a breaking point shouldering heavy price inflation.  TSCL is opposed to cutting Medicare benefits, and the shifting more costs to beneficiaries.