Recent policy adjustments and economic changes have reduced the projected lifespan of the trust fund that finances Medicare Part A by 12 years, according to a report from the Congressional Budget Office (CBO). The Hospital Insurance (HI) Trust Fund is now expected to be fully depleted by 2040, even though its balance generally grows through 2031, as expenditures will start to surpass income in the following year.
This swift decline in Medicare’s financial stability marks a sharp drop from the CBO’s prior estimate, released just last year in March 2025. The significantly shortened timeframe means future retirees may face major cuts to essential healthcare services much earlier than previously thought. As mandated by the Deficit Control Act, CBO Director Phillip Swagel noted the projections assume benefits would be paid as scheduled even after the HI trust fund is exhausted.
The main cause of this accelerated depletion is a steep decrease in the fund’s projected income, largely driven by legislation enacted over the past year. Specifically, the 2025 reconciliation act (Public Law 119-21, more commonly called the One Big Beautiful Bill Act) substantially reduced the revenues the trust fund typically receives from taxing Social Security benefits. This legislation lowered tax rates and introduced a temporary deduction for taxpayers aged 65 or older. As a result, this major policy change implemented during the Trump administration has directly contributed to depriving the Medicare safety net of crucial future funding.
What is the HI trust fund?
The HI trust fund serves as the financial foundation for Medicare Part A, which covers essential services such as inpatient hospital care, stays in skilled nursing facilities, home health care, and hospice care. Over the next 30 years, the fund is projected to rely on the Medicare payroll tax for about three-quarters of its annual income, with roughly another one-eighth coming from income taxes on Social Security benefits.
However, the recent tax cuts are not the only factor draining the fund. The CBO also pointed to reduced projections for payroll tax revenues, noting it had to adjust its models to account for lower expected worker earnings. Additionally, because the trust fund will have smaller balances in the future, it will generate less interest income, creating a cumulative negative impact on its overall finances.
On the expenditure side, Medicare spending is increasing more quickly than anticipated. The CBO reported that per-enrollee spending in Medicare Part A’s fee-for-service program in 2025, along with 2026 bids from Medicare Advantage plan providers, both came in higher than expected.
The implications of the fund’s depletion in 2040 would be severe for both seniors and healthcare providers. By law, if the trust fund is depleted and spending continues to exceed income, Medicare would be legally limited to disbursing only the amount it collects. To address the shortfall, total benefits would need to be cut drastically. The CBO estimates these benefit reductions would begin at 8% in 2040 and gradually rise to a 10% cut by 2056. It remains unclear how the Centers for Medicare & Medicaid Services would administer the program under such severe financial limitations.
Resolving this approaching crisis will require substantial legislative measures. The fund currently has a 25-year actuarial deficit of 0.30% of taxable payroll—a figure representing the total earnings subject to the payroll tax. This deficit is 0.17 percentage points more severe than last year’s projection. To eliminate this deficit and recover the 12 years of solvency lost over the past 11 months, lawmakers will need to raise taxes, reduce healthcare payments, transfer funds into the trust fund, or adopt a combination of these politically challenging methods.
Notably, these already bleak baseline projections remain highly uncertain and do not yet factor in the potential economic or budgetary impacts of the recent Supreme Court ruling on tariffs (Learning Res., Inc. v. Trump, issued on February 20, 2026).