Recent projections show a sharp decline in Medicare Part A trust fund solvency, with the program’s hospital insurance reserve now expected to be exhausted by 2040. According to a new report from the Congressional Budget Office, the updated timeline erases 12 years of projected stability in less than a year.
The revised outlook marks a significant shift from the agency’s March 2025 estimate. While the Hospital Insurance Trust Fund balance is projected to continue rising through 2031, spending is expected to exceed income beginning the following year. Once reserves are depleted, Medicare would only be permitted to pay benefits equal to incoming revenue, triggering automatic reductions.
A Revenue Base Under Pressure
Donald Trump’s 2025 reconciliation legislation, formally known as the One Big Beautiful Bill Act, plays a central role in the deteriorating outlook. The law reduced tax rates and created a temporary deduction for Americans aged 65 and older. One consequence was a reduction in revenues collected from taxation of Social Security benefits, a funding stream that partially supports Medicare’s hospital insurance program.
The Congressional Budget Office identified this legislative change as a primary driver of declining income projections. The agency also revised its payroll tax assumptions downward, reflecting lower expected worker earnings over the coming decades. Because the trust fund will carry smaller balances than previously anticipated, it will also earn less interest income, compounding the fiscal strain.
Over the next 30 years, roughly three quarters of the trust fund’s revenue is expected to come from Medicare payroll taxes. About one eighth typically comes from income taxes on Social Security benefits. When either stream weakens, the long term funding gap widens.
What Happens in 2040?
Congressional Budget Office Director Phillip Swagel noted that the agency’s projections assume benefits continue as scheduled even after depletion, in accordance with the Deficit Control Act. In practice, however, the law limits Medicare to paying only what it collects once the trust fund balance reaches zero.
If depletion occurs in 2040, the agency estimates that benefit payments would need to be reduced by about 8 percent in the first year. By 2056, that reduction could grow to 10 percent if no corrective action is taken.
The implications extend beyond beneficiaries. Hospitals, skilled nursing facilities, and hospice providers rely heavily on Medicare Part A reimbursements. Payment cuts of that scale would pressure provider margins, potentially affecting service availability, especially in rural and underserved areas.
Spending Trends Add to the Strain
Revenue pressures are only one side of the equation. The CBO also reported higher than expected per enrollee spending in the traditional fee for service Medicare Part A program in 2025. In addition, 2026 bids submitted by Medicare Advantage plans came in above earlier estimates, suggesting sustained cost growth across the program.
Centers for Medicare & Medicaid Services oversees program administration, but it remains unclear how the agency would manage across the board reductions if the trust fund is exhausted. By statute, CMS cannot pay out more than incoming revenues without congressional intervention.
The trust fund now faces a 25 year actuarial deficit equal to 0.30 percent of taxable payroll, a measure that captures the share of earnings subject to Medicare taxes. That figure is 0.17 percentage points worse than last year’s projection, underscoring how quickly the financial outlook has shifted.
Policy Choices Ahead
Restoring Medicare Part A trust fund solvency will require legislative action. Lawmakers have several tools available, including raising payroll taxes, scaling back provider payments, transferring funds from general revenues, or adopting a blended approach. Each option carries political and economic tradeoffs.
Higher payroll taxes could strengthen the trust fund but would increase costs for workers and employers. Reducing provider payments could ease fiscal pressure but might affect care delivery. General revenue transfers would stabilize Medicare but add to federal budget deficits.
The updated projections also do not incorporate potential fiscal effects stemming from the recent Supreme Court decision in Learning Resources Inc. v. Trump, which addressed tariff authority. Any economic slowdown or trade disruption could further influence payroll growth and tax receipts.
For investors, employers, and retirees, the accelerated depletion date reinforces a broader reality. Medicare’s financing structure remains sensitive to policy shifts and demographic trends. With 2040 now less than 15 years away, the window for gradual reform is narrowing.
