Each year the Congressional Budget Office (CBO) produces a report on the fiscal status of various federal government trust funds. A trust fund is an accounting mechanism that links designated receipts for a specific purpose or program with corresponding outlays. Earlier this month, CBO released The Outlook for Major Federal Trust Funds: 2020 to 2030, which projected forthcoming fiscal shortfalls for the Medicare, Social Security, and Highway trust funds. The report illustrates that the COVID-19 pandemic exacerbated the already-poor fiscal health of these trust funds, which now face sooner than expected insolvency dates.
Medicare. Millions of older Americans rely on Medicare for medical insurance or other health care benefits. To pay out these benefits, the program relies on the Hospital Insurance (HI) Trust Fund and the Supplementary Medical Insurance (SMI) Trust Fund.
The HI Trust Fund—primarily financed through payroll taxes—covers inpatient hospital services and nursing home care under Medicare Part A. According to CBO, the HI Trust Fund is projected to be insolvent by 2024, two years earlier than the agency projected prior to the pandemic. At this time, unless Congress acts, the HI Trust Fund will only be able to pay for Part A services equal to the amount of revenues available, approximately 83 percent of the scheduled benefits.
The SMI Trust Fund pays for physician services and prescription drugs covered under Medicare Part B and Part D. While the SMI Trust Fund is funded mostly through general revenue transfers (in addition to premiums) and therefore cannot become insolvent, the Medicare Board of Trustees has expressed concern about the growing projected long-term costs of the program.
Social Security. Within Social Security, there are two separate trust funds: the Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund. These trust funds are financed by payroll taxes imposed on employers and employees. Before the pandemic, both funds were moving quickly toward insolvency, primarily as a result of our aging population. According to CBO’s recent report, the OASI Trust Fund is on track to become insolvent in 2031 and the DI Trust Fund in 2026 (both earlier than previously projected). Following the insolvency dates for each account, the law states that benefits paid cannot exceed collected receipts. For the DI Trust Fund, this would result in a benefit cut of 11 percent in 2027. OASI benefit reductions were not projected in the recent CBO report.
Highway Trust Fund. The Highway Trust Fund (HTF) finances the construction of highways and highway safety programs, in addition to mass transit programs. Primarily funded through excise taxes on gasoline and other motor fuels, CBO projects that the HTF will be exhausted in 2021. Following exhaustion, HTF spending would be limited to no more than the receipts collected, approximately 25 percent below the amounts in CBO’s baseline projections in 2022.
Congress Must Act. It is not a matter of if, but when these trust funds will be depleted. Without significant reform to correct the unsustainable fiscal trajectories of the Medicare, Social Security, and Highway trust funds, these programs will become insolvent and will fail. At that time, America will be forced to reduce program benefits for the millions of Americans who depend on them today and those who hope to depend on them in the future.