5 Key Takeaways From the 2018 Medicare Trustees' Report

It's no big secret that Medicare isn't exactly on solid financial footing, but the recently released 2018 Medicare Trustees Report shows that the problem may be even worse than we thought. With that in mind, here are five key takeaways from the 260-page report that Americans need to hear, and what they could mean to you.

The Hospital Insurance (HI) trust fund is set to run out of money three years sooner

According to last year's trustees report, Medicare was expected to run out of money in the hospital insurance (HI) trust fund by 2029. Simply put, there are gradually going to be more and more people collecting Medicare benefits, and not enough people paying into the system, but we'll get into that more later on. [Note: The hospital insurance trust fund supports Medicare Part A. Parts B and D, medical insurance and prescription drug coverage, are both funded through premiums and general revenues and are therefore not in trouble.]

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As if this wasn't bad enough, the recently released 2018 trustees report found that the HI trust fund is now expected to be depleted in 2026 -- three years earlier than previously expected. This is just eight years away.

The reasons for the more pessimistic estimate? Payroll taxes for 2017 were lower than expected, recent legislation made fewer peoples' Social Security benefits taxable, and higher-than-expected expenditures, both in 2017 and going forward.

Medicare's reserves are well under the comfortable level

At first, it may sound like a good thing that the hospital insurance trust fund ended 2017 with $202 billion in reserves. After all, that's a lot of money, and having a 12-figure reserve balance is certainly better than zero.

Here's the problem. The Medicare trustees recommended minimal level of funding is 100% of the program's annual expenditures. $202 billion represents just 65% of hospital insurance's projected 2018 costs. In fact, the HI trust fund hasn't exceeded the 100% "safety net" level since 2003.

For context, you've probably heard that Social Security is also in bad shape. Well, Social Security's reserves represent about 300% of the program's annual expenditures. This is why even with the same challenging demographic trends, Social Security's reserves are expected to fully support the program for an additional eight years, until 2034.

Medicare ran a small surplus in 2017, but it's the last one

One of the few pieces of good news in the trustees report is that Medicare hospital insurance ran a surplus in 2017. The program took in $299.4 billion during the year, mostly in the form of payroll taxes, and the total expenditures of the program were $296.5 billion, for a surplus of nearly $3 billion.

However, that's where the good news ends. The 2017 surplus is expected to be the last one for the foreseeable future, unless something drastic changes.

And the deficits are expected to get big fast. Here are the official projections for the HI trust fund over the next 10 years:

Data source: 2018 Medicare Trustees Report. Parenthesis are used to show negative numbers, and figures may not add or subtract perfectly due to rounding.

Here's the problem

There are two main problems with Medicare, and with Social Security for that matter. First, Americans are living generally longer lives, so the average beneficiary is collecting benefits for a longer period of time.

The age of eligibility for Medicare for senior citizens is 65 years old. In 2015 (the most recent actuarial data available), the average 65-year-old man could be expected to live for another 17.8 years. In 2005, the average was about 16.7 years. In other words, the average senior male is utilizing Medicare for more than a year longer than the average senior male a decade before.

For women, the spread is slightly smaller at 0.9 years, but this still means that the average senior citizen is living about one year longer than just a decade ago. And with advances in medicine and trends toward healthier lifestyles, this trend is likely to continue.

Second, the massive baby boomer generation is reaching retirement age, and will continue to do so over the next decade or so. Combined with the longer life expectancies, the effect will be more beneficiaries utilizing Medicare and fewer workers paying into the system.

As a Medicare-specific problem, it's also not helping that healthcare costs are rising at a slightly faster rate than overall inflation. Over the long run, the trustees report projects that the consumer price index (CPI) will rise at an average rate of 2.6% per year, while the per-beneficiary cost of hospital insurance will rise by 3.7%.

Medicare's shortfall

The overall effect of these demographic and economic trends is a shortfall equal to 0.82% of taxable payroll over the next 75 years, according to the report. Since half of the Medicare tax is paid by the employer and half by the employee, this means that a 0.41% hike in the Medicare payroll tax rate to 1.86% each for employers and employees could solve the problem for the foreseeable future.

To be clear, there are other approaches that could be taken, such as gradually phasing in a tax increase, only increasing taxes on wealthy Americans, or raising the eligibility age for Medicare. However, the point is that there is a serious funding shortfall projected for Medicare, and the window to deal with it just got three years shorter.