What Are the Medicare Trust Funds (and Why Should I Worry About Them)?

Retirees count on a combination of retirement benefits from Social Security and healthcare benefits from Medicare to give them the peace of mind they need to live well in their older years. Medicare and Social Security get their financial support from the American public, with some of it coming directly from sources like payroll taxes and some of it coming indirectly through appropriations from the overall federal budget.

Most people know about the Social Security Trust Funds, which have saved up money in anticipation of the demographic bulge of retiring Americans that have pushed benefit expenditures of the program to exceed the revenue that Social Security pulls in. But Medicare also has trust funds, and they play an equally vital but somewhat different role in protecting Medicare participants from financial hardship.

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2 trust funds for Medicare

Medicare has two different trust funds that offer financial support for various Medicare benefits. The Hospital Insurance Trust Fund, or HI Trust Fund for short, goes toward paying the hospital and inpatient care expenses that Medicare Part A typically covers. It also contributes toward covering the costs of program administration, including efforts to fight fraud and abuse of the Medicare system.

The Supplementary Medical Insurance or SMI Trust Fund covers other medical expenses associated with different parts of the Medicare program. Its assets go toward funding outpatient expenses like doctor visits under Medicare Part B. It also helps finance prescription drug plan coverage under Medicare Part D. A portion of the SMI Trust Fund’s assets also goes toward overall Medicare administration costs.

Where do the Medicare trust funds get their money?

The two programs get funded in very different ways. The 1.45% in Medicare taxes that get withheld from your paycheck, along with your employer’s matching 1.45% tax, go into the HI Trust Fund. Some of the income taxes that select taxpayers owe on their Social Security benefits also gets put into the HI Trust Fund, as does premium revenue from the relatively small number of recipients who lack sufficient employment history to get free Part A coverage and therefore have to pay premiums to get that coverage. Interest on the fund is the final component of the income the HI Trust Fund pulls in.

The SMI Trust Fund relies much more on participant income. Most people pay their own premiums for Medicare Part B coverage for medical services, and those who elect prescription drug coverage under Medicare Part D often pay additional premiums. That money helps to fund those benefits, and premiums are set in such a way that they can meet about 25% of the costs of providing Part B and Part D services. Any additional resources come from funds authorized by Congress, which are paid from the general budget. Trust fund interest is also available as necessary.

Should you worry about the Medicare Trust Funds?

This year’s report from Medicare’s trustees raised new alarm bells about the financial sustainability of the program. With just $202 billion in the HI Trust Fund, the trustees estimate that money will be gone by 2026, three years sooner than it expected in the 2017 report.

The SMI Trust Fund has no direct concerns because of its reliance on the general fund of the federal government for support. Yet cost increases threaten both to expand federal budget needs and to raise premiums that participants pay for Part B and Part D Medicare coverage.

The primary reason why fewer people worry about Medicare than Social Security is that the federal government has long seen the need to supplement the dedicated funding sources that support the healthcare program with money from the general fund. Therefore, if trust funds for Medicare run out of money, it would just require a larger appropriation from other federal sources. Nevertheless, with some politicians looking to rein in entitlement spending, Medicare participants must be diligent in order to defend the benefits they rely on for their health and well-being.

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