Future Retirees May Face Major Health Service Cuts As Medicare Trust Fund Nears Depletion By 2040

The Congressional Budget Office (CBO) said the Hospital Insurance trust fund, which funds Medicare Part A, will be depleted by 2040, according to a new projection released on February 23. The projection marks a shift from the CBO's March 2025 estimate, which projected solvency until 2052.

Under the Trump administration, the projected life of the fund has been reduced by 12 years. The Hospital Insurance trust fund finances Medicare Part A, which pays for hospital stays, nursing facility care, home health care and hospice care.

The fund is being depleted faster than projected because of legislative changes and higher-than-expected healthcare costs. Its income sources include the Medicare payroll tax and the income taxes on Social Security benefits.

The fund’s income declined in the past year after the enactment of the "One Big Beautiful Bill". The law introduced a temporary tax deduction for people 65 or older, lowering overall taxes but reducing the trust fund’s earnings from income taxes paid on Social Security benefits.

Meanwhile, expenditure increased in 2025. The CBO also revised its economic forecast to account for lower overall labor-market earnings. Because the trust fund's balance is now expected to remain lower for longer, it will earn less interest on the government securities it holds, which is another reason for the 12-year shift in projected solvency.

The exhaustion of the fund in 2040 does not mean Medicare Part A will end. Patients will still receive benefits, but the depletion of reserves would trigger funding constraints.

Under federal law, Medicare cannot spend money it does not have. Once reserves are exhausted in 2040, the program can only pay out what it collects in annual taxes. The CBO estimated total payments to hospitals and medical providers would need to be reduced by 8 percent in 2040. The gap is projected to widen to 10 percent by 2056.

The reductions could lead hospitals and nursing homes to limit the number of Medicare patients they accept. The CBO released the report on February 23 and stated, “As required by the Deficit Control Act, our projections reflect the assumption that benefits would be paid as scheduled even after the HI trust fund was exhausted.”

The CBO said, “If the balance of the fund was exhausted and the fund's spending continued to outstrip its income, total payments to health plans and providers for services covered under Part A would be limited by law to the amount of income credited to the fund. Total benefits would need to be reduced by an amount that rises from 8 percent in 2040 to 10 percent in 2056, we estimate."

The CBO based the 2040 projection on demographic, economic, and long-term budget trends. The timeline could change as the agency regularly updates Congress on its projections.