Rising health care costs and an aging population will require Medicare benefit cuts or tax increases, the program’s trustees report.
There is not much good news in the 2023 annual report from the Board of Trustees of the Federal Hospital Insurance (HI) and Supplemental Insurance Trust Funds. The Trustees project the HI Trust Fund (Medicare Part A) will be insolvent in 2031, three years later than last year’s report forecast. The report projects a 75-year shortfall in the HI Trust Fund of 0.62 to 1.46 percent of the taxes dedicated to funding the program.
The Trustees project total Medicare spending will grow from 3.7 percent to 6.0 percent of gross domestic product (GDP) by 2046 and remain at that level thereafter.
An alternative scenario developed by the Medicare Chief Actuary is included in the report. The actuary projects total Medicare spending will rise to 8.3 percent of GDP by 2097, which is considerably higher than the 6.0 percent to 6.3 percent increase by 2097 forecast by the Trustees.
Tough Choices Ahead
If the HI Trust Fund is emptied in 2031, seniors will be in serious trouble, according to an analysis of the trustees’ report by the Committee for a Responsible Federal Budget (CRFB).
“At that point, the law requires spending to be cut 11 percent to match revenue, with the cut growing to 19 percent by 2047,” states the CRFB. “The result would likely be a reduction in health services.”
Both the Trustees and the Chief Actuary conclude the shortfall in HI will require raising taxes, says the CRFB.
“Restoring solvency to the HI trust fund over the next 75 years would require the equivalent of immediately raising the HI payroll tax by 21 percent (0.6 percentage points) or reducing spending by 13 percent,” states the CFRFB. “Under the Chief Actuary’s alternative scenario, the shortfall and necessary adjustments would require immediately raising the HI payroll tax by 50 percent (1.5 percentage points) or reducing expenditures by 26 percent.”
Spending Up, Up, Up
Total Medicare spending has risen from 2.2 percent of GDP in 2000 to 3.9 percent in 2023 and will continue to grow under the Trustees’ projections, says the CRFB.
“Specifically, the Trustees project that costs will grow further to 5.5 percent by 2035 and 6.0 percent by 2050,” states the CRFB analysis. “Beyond 2050, cost growth will moderate to about the pace of GDP growth, with costs reaching a high of 6.3 percent in 2076 before gradually dipping to 6.1 percent in 2097.”
Much of the growth in expenditures will come from the rising cost of Medicare Part B (outpatient care), which is expected to rise from 1.9 percent of GDP in 2023 to 3.5 percent in 2097, state the Trustees. The cost of Medicare Part A (HI) is projected to rise from 1.5 percent of GDP in 2023 to a high of 2.2 percent in 2045 before gradually leveling off to 2.0 percent in 2097.
The Inflation Reduction Act (IRA) of 2022, which provided for Medicare and pharmaceutical manufacturers to negotiate prices on certain drugs, will hold down the costs of Medicare Part D (drug benefits) by limiting the rise from 0.5 percent of GDP in 2023 to 0.7 percent by 2097, according to the Trustees.
Advantage Plans Increasingly Popular
The Trustees also project a growing number of seniors will enroll in Medicare Advantage (MA), or private insurance plans.
“The private Medicare health plan enrollment projections for the 2023 Trustees Report are higher than those in the 2022 report,” said the Trustees. “[T]he share of Medicare enrollees in private health plans is projected to increase from 45.9 percent in 2022 to 55.9 percent in 2032.”
These increases said the Trustees, “are partly due to higher relative rebates that are used to lower premiums and expand coverage.”
The Biden administration proposed extending the solvency of Medicare into the 2050s by increasing the payroll tax rate from 3.8 percent to 5 percent for households making more than $400,000 a year, on March 7.
U.S. Rep. Jason Smith (R-MO), chairman of the House Ways and Means Committee, favored a different approach in a statement responding to the Trustees report, on April 1.
“We need to protect and strengthen Social Security and Medicare, and the first step to accomplishing that is growing the economy—not budget gimmicks or tax increases that hold back economic growth,” said Smith. “In fact, that’s precisely what Americans are telling the Ways and Means Committee during our hearings throughout the country.”
Progressive Medicare Taxes
Medicare taxes are already highly progressive, says Merrill Matthews, a resident scholar at the Institute for Policy Innovation.
“Biden’s proposal to raise taxes to address Medicare’s future financial problem ignores how progressive Medicare taxes already are,” said Matthews. “Besides Medicare’s payroll taxes, 2.9 percent (split by the employer and the employee), and an additional 0.9 percent for those making $200,000 or more, the government forces Medicare recipients to pay higher Part B and Part D premiums, based on their income.”
The income-based premiums double or triple the cost of Part B for some seniors says Matthews.
“For example, a senior with an income between $123,000 and $153,000 will pay an additional $164.80 for their monthly Part B premium, on top of the $164.90 base Part B premium,” said Matthews. “If that person’s income is between $183,000 and $500,000, that individual will pay $362.60 a month above the base Part B premium. Those increased premiums, based on income, are a tax, and a very progressive tax at that.”
Bonner Russell Cohen, Ph.D. (firstname.lastname@example.org) is a senior fellow at the National Center for Public Policy Research.