On February 23, 2026, the Congressional Budget Office released a projection that reverberated across Washington's policy circles: the Hospital Insurance (HI) Trust Fund — the financial engine behind Medicare Part A — will be exhausted by 2040. That date, alarming in itself, becomes far more striking in context. Just twelve months earlier, the CBO had set the same deadline at 2052. In less than a year, twelve years of projected solvency vanished.
This is not a routine actuarial revision. It is a policy-driven acceleration of a structural crisis that the United States has been slow-walking toward for decades. Understanding what happened, why it happened, and what it means requires peeling back several layers of fiscal, political, and demographic reality.
What the Trust Fund Actually Does
The HI Trust Fund is not a metaphor or an accounting abstraction. It is the mechanism through which Medicare Part A pays for inpatient hospital care, skilled nursing facilities, home health services, and hospice. Approximately 70 million elderly and disabled Americans depend on it. The fund draws roughly three-quarters of its income from the Medicare payroll tax — a 2.9% levy split between employers and employees — with an additional eighth coming from taxes on Social Security benefits.
Its balance stood at approximately $238 billion at the start of 2025, according to the Medicare Trustees, and the CBO projects it will continue to grow through 2031. After that, spending will begin to outrun revenue. The gap will widen steadily until 2040, when the fund hits zero.
Exhaustion does not mean the program disappears. By law, Medicare cannot spend money it doesn't have. What happens instead is an automatic, legally mandated reduction in payments: the CBO estimates benefit cuts beginning at 8% in 2040 and climbing to 10% by 2056. For a program serving tens of millions of seniors, these are not abstract percentages — they translate directly into reduced payments to hospitals and nursing homes, which in turn are likely to limit the number of Medicare patients they accept.
The Policy Trigger: The "One Big Beautiful Bill"
The single largest factor driving the revised timeline is legislative. The 2025 reconciliation act — colloquially known as the "One Big Beautiful Bill" — signed by President Trump in July 2025, introduced two revenue-reducing provisions with immediate consequences for Medicare's finances.
First, the legislation lowered overall tax rates. Second, and more directly consequential for the HI Trust Fund, it created a temporary deduction for taxpayers aged 65 and older. This deduction substantially reduced the federal income taxes paid on Social Security benefits — and income tax revenues from Social Security flow directly into the HI Trust Fund. Less tax on Social Security income means less money entering Medicare's coffers.
The CBO identified this as the primary driver of the revised projection. The interaction between senior-focused tax relief and Medicare financing mechanics creates a complex fiscal trade-off: a provision designed to increase disposable income for older Americans simultaneously reduces the revenue stream on which their hospital coverage depends. Total Medicare expenditures reached $1.1 trillion in 2024; reducing the tax contribution from Social Security benefits — one of the fund's primary revenue levers — compounds an already widening structural gap.
A methodological note is warranted here. The CBO scores legislation based on current law and established economic assumptions, without modeling behavioral or macroeconomic feedback effects. This means its projections capture the direct, mechanical fiscal impact of enacted changes but do not account for potential growth effects that could increase taxable earnings and payroll contributions over time. The administration has argued that broader economic expansion will generate offsetting revenues — a plausible hypothesis, but one that falls outside the CBO's scoring framework. The agency's projections, by design, reflect policy as written rather than anticipated indirect effects.
Compounding Pressures: Demographics and Rising Costs
The legislation is not the only culprit. The CBO's analysis points to two additional forces that are independently accelerating the fund's depletion.
The first is demographic. The United States is in the midst of a prolonged aging transition. Baby Boomers have been entering Medicare eligibility for over a decade, and the cohort is large. Meanwhile, birth rates have declined, meaning fewer younger workers are paying into the system to support a growing beneficiary population. This ratio — workers to enrollees — is the structural heartbeat of Medicare's finances, and it is moving in the wrong direction.
The second is cost inflation within the program itself. The CBO noted that per-enrollee spending in Medicare Part A's fee-for-service program came in higher than expected in 2025. Simultaneously, the bids submitted by Medicare Advantage plan providers for 2026 exceeded projections. These are not one-time anomalies; they suggest a baseline of rising per-person healthcare expenditure that the fund's revenue structure is not designed to accommodate at its current tax rates.
The operational consequences of this cost trajectory are already visible at the provider level. Hospital margins — compressed by years of modest payment updates that have lagged medical cost inflation — face further pressure as any future payment reductions from trust fund shortfalls would fall disproportionately on inpatient facilities. Rural hospitals, which operate with thinner margins and higher Medicare patient concentrations, carry the greatest exposure: a payment cut of 8 to 10 percent could render many of them economically unviable. Meanwhile, above-projection Medicare Advantage bids signal that plans are pricing in higher care utilization, which tends to trigger CMS rate recalibration cycles that further squeeze plan economics and, indirectly, provider contracting leverage.
There is also a compounding dynamic worth noting: because the trust fund will carry smaller balances in coming years due to the revenue shortfall, it will generate less interest income. A smaller fund earns less; a fund earning less depletes faster. The mathematics are self-reinforcing in the wrong direction.
The Structural Reform Gap
None of this should be entirely surprising. Warnings about Medicare's long-term fiscal trajectory have been a fixture of budget debates for at least three decades. The program's own trustees have consistently flagged insolvency risks — and their current projection, notably, is even more pessimistic than the CBO's: Medicare's trustees expect the HI fund to run dry by 2033.
What is notable is not the existence of the problem, but the persistent difficulty of assembling a legislative coalition to address it. Congress has never allowed the Medicare trust fund to actually run out. But it has also rarely taken proactive steps to address the structural imbalance — relying instead on short-term patches, payment rate adjustments, and the expectation that deadline revisions would provide additional lead time.
That approach is becoming increasingly untenable. Experts consistently note that meaningful reforms — whether revenue increases, benefit restructuring, or efficiency-driven cost reductions — take years to implement and take effect. A crisis addressed in 2039 is effectively a crisis not addressed at all.
The options available are not comfortable: raise the payroll tax rate, expand the tax base, restructure benefits, drive structural efficiencies in care delivery, or some combination of all of the above. The Medicare Trustees estimate that an immediate payroll tax increase to 3.67% — from the current 2.9% — or an immediate 16% reduction in expenditures would each, on their own, restore 75-year solvency. Neither option is cost-free, but both illustrate the scale of the adjustment required and the advantage of beginning that adjustment sooner rather than later.
The Broader Fiscal Risk
The Medicare situation does not exist in isolation. The CBO's parallel projections suggest Social Security's trust funds will be exhausted by fiscal year 2032 — effectively running dry in late 2031. The convergence of these two timelines creates a compounding fiscal challenge: within roughly a decade, two of the largest entitlement programs in the federal budget will face simultaneous insolvency crises.
If Congress opts to fund the shortfalls through general revenue rather than structural reform — the path of least political resistance — economists warn of downstream consequences. Financing Medicare and Social Security deficits with debt would add substantially to an already elevated federal borrowing load, potentially triggering higher long-term interest rates and crowding out other government spending. Bond markets have historically penalized fiscal trajectories that lack credible correction mechanisms.
The alternative — allowing automatic benefit cuts to take effect — would impose immediate, concentrated harm on the most financially vulnerable segment of the population. Neither outcome is acceptable policy. Which is precisely why the window for a managed, deliberate reform process, rather than a forced crisis response, matters so much.
The CBO's February 2026 projection is not a death sentence for Medicare. The program will continue to function past 2040. But it is a precise, quantified warning that the combination of recent tax policy, demographic shifts, and rising healthcare costs has narrowed the available response window dramatically. Twelve years of fiscal runway, eliminated in twelve months.
The question now is whether this revised projection will be treated as an administrative footnote or as the kind of quantified, time-bounded signal that generates genuine legislative momentum. Historical precedent offers limited encouragement. The arithmetic, increasingly, leaves less room for delay.
Sources
- Congressional Budget Office. CBO's Updated Projections of the Hospital Insurance Trust Fund's Finances. February 23, 2026. https://www.cbo.gov/publication/62165
- Congressional Budget Office. February 2026 Budget and Economic Outlook. February 11, 2026. https://www.cbo.gov/publication/62032
- Healthcare Dive. GOP's 'Big Beautiful Bill' erases 12 years of solvency for Medicare trust fund: CBO. February 24, 2026. https://www.healthcaredive.com/news/medicare-trust-fund-expire-2040-cbo-gop-obbb/812937/
- Fortune. In less than a year, Trump erased 12 years of solvency for the trust fund that pays for Medicare Part A. February 23, 2026. https://fortune.com/2026/02/23/how-trump-wiped-out-12-years-of-medicare-funding-cbo-one-big-beautiful-bill/
- Fierce Healthcare. CBO estimates Medicare Trust Fund will run out in 2040. February 24, 2026. https://www.fiercehealthcare.com/regulatory/cbo-estimates-medicare-trust-fund-will-run-out-2040
- Committee for a Responsible Federal Budget. CBO's February 2026 Budget and Economic Outlook. February 11, 2026. https://www.crfb.org/papers/cbos-february-2026-budget-and-economic-outlook
- American Hospital Association. CBO projects Hospital Insurance Trust Fund to be solvent until 2040. February 24, 2026. https://www.aha.org/news/headline/2026-02-24-cbo-projects-hospital-insurance-trust-fund-be-solvent-until-2040
