Medicare’s Main Trust Fund Faces 2040 Insolvency After Major Revenue Cuts

Medicare’s financial footing shifted dramatically this year. The Congressional Budget Office now projects the Hospital Insurance Trust Fund will be fully exhausted by 2040, a full 12 years sooner than it estimated in March 2025. The fund, which underwrites Medicare Part A coverage for millions of Americans, is on track to see its balance grow through 2031 before spending begins outpacing income the following year.

The Hospital Insurance Trust Fund is the financial engine behind Medicare Part A, covering inpatient hospital care, skilled nursing facility stays, home health services, and hospice care. Over the next 30 years, roughly three-quarters of its annual income is expected to come from Medicare payroll taxes, with about one-eighth drawn from income taxes on Social Security benefits, according to the CBO.

CBO Director Phillip Swagel noted the projections assume benefits would continue to be paid as scheduled even after the trust fund runs dry, as required under the Deficit Control Act. The findings reflect three layers of CBO analysis, demographic data published in January 2026, economic and budget projections from February 11, 2026, and long-term forecasts built on top of both.

Recent Tax Legislation Is the Biggest Driver of the Fund’s Decline

The steepest blow to the fund’s projected income comes from the 2025 reconciliation act, Public Law 119-21, more widely known as the One Big Beautiful Bill Act. The legislation lowered tax rates on Social Security benefits and created a temporary deduction for taxpayers aged 65 or older, directly reducing the stream of revenue the trust fund normally counts on each year.

Beyond the reconciliation act, the CBO also revised its payroll tax projections downward to reflect expectations of lower worker earnings. Because the trust fund will carry smaller balances going forward, it will also generate less interest income than previously forecast, creating a compounding drag on the fund’s overall financial position, according to the agency’s February 2026 update.

Spending pressures are adding to the strain. Per-enrollee costs in Medicare Part A’s fee-for-service program came in higher than the CBO anticipated in 2025, and bids submitted by Medicare Advantage plan providers for 2026 also exceeded expectations. Both factors contributed to projections of greater overall spending across the program going forward.

What a 2040 Exhaustion Would Mean for Seniors and Providers

If the trust fund reaches zero and spending continues to exceed income, federal law would cap Medicare payments at whatever income the fund receives that year. The CBO estimates that under those conditions, total benefits would need to be reduced by 8% in 2040, with cuts climbing to 10% by 2056. How the Centers for Medicare & Medicaid Services would manage the program under those constraints remains unclear, the agency noted.

The fund’s 25-year actuarial deficit now stands at 0.30% of taxable payroll, which is the total amount of wages and self-employment income subject to the payroll tax. That figure is 0.17 percentage points worse than last year’s projection.

The CBO cautioned that small shifts in spending or income forecasts can significantly alter the fund’s projected balance, and that all estimates carry a degree of uncertainty. Notably, the agency noted its February 2026 update does not reflect any economic or budgetary effects of the Supreme Court’s February 20 ruling on tariffs in Learning Res., Inc. v. Trump.

Restoring Solvency Will Require Action From Lawmakers

To close the actuarial deficit and restore the 12 years of projected solvency lost over the past 11 months, several paths are available to Congress. Lawmakers could raise taxes, reduce payments to health plans and providers, transfer money directly into the trust fund, or pursue some combination of those approaches.

The estimated size of any fix, 0.30% of taxable payroll, does not account for how policy changes might affect individual behavior or the broader economy. Those ripple effects would ultimately influence how large a tax increase, benefit reduction, or direct transfer would actually need to be to close the gap and keep the fund solvent over the long term.

The 2040 deadline carries real consequences for people already planning their retirement. Future retirees currently in their 40s and 50s are the ones most directly in the path of these projected shortfalls. Without legislative action, the cuts the CBO projects would fall entirely on seniors and health care providers who depend on Part A coverage for some of the most critical services Medicare offers.