There are several popular misconceptions about the financial condition of Medicare, which virtually all American senior citizens rely on to cover health care expenses in retirement. Many people believe that Medicare is broke, or that there’s virtually no chance that Medicare will still be around by the time they retire. Spoiler alert: Neither of these are true.
Let’s set the record straight. The Medicare trustees recently released their annual report, which detailed the financial condition of Medicare at the end of 2016, as well as future projections of the program’s finances for the next 75 years. Here are some of the important takeaways from the report that you should be aware of, and what it means to you.
The safety of Medicare Parts B and D aren’t in question
Medicare has two separate trust funds — one to cover Medicare Part A (the Hospital Insurance, or HI, trust fund), and one to cover Parts B and D (the Supplementary Medical Insurance, or SMI, trust fund). Before we get into a discussion of Medicare’s financial health, it’s important to point out that any discussion of Medicare going “broke,” or running short of funds, is only referring to the HI trust fund.
Without getting too in depth, Medicare Parts B (medical insurance) and D (prescription drug coverage) are mainly funded through premiums paid by beneficiaries, as well as by general revenue. Both of these sources can be adjusted relatively easily. In other words, if these programs project higher operating costs next year, they can simply raise premiums to generate more revenue.
On the other hand, the HI trust fund supports Medicare Part A, which is free to the vast majority of retirees. Therefore, there is very little premium income that can be controlled.
The major source of revenue for the HI program is the Medicare portion of the payroll tax, as well as an additional 0.9% additional Medicare tax assessed on higher-earning Americans. This tax rate is the current law, and to adjust it to increase revenue would require an act of Congress.
Medicare Part A is also fine — for now
Having said that, Medicare Part A is on decent financial footing for the time being. In 2016, Medicare Part A took in $290.8 billion in total income and paid out $285.4 billion in benefits and administrative expenses, for a surplus of $5.4 billion. This surplus was added to the HI trust fund, which held a total of $199.1 billion in reserves at the end of 2016. These reserves are invested in U.S. Treasury securities, and earn interest, which serves as another financing source for the program.
Furthermore, surpluses are expected to continue in 2017 through 2022, so between these surpluses and the interest earned on the trust fund’s reserves, we can expect to see the reserves grow significantly over the next several years. In 2022, the balance of the HI trust fund is projected to be $265.8 billion, about 33% higher than the current level.
The problem with Medicare’s finances
The trouble starts after 2022. Beginning in 2023, Medicare Part A is expected to start running deficits, which are expected to get larger as time goes on.