CBO Updates Major Trust Fund Baselines
The Congressional Budget Office (CBO) updated its projections last week on the financial status of the major trust funds for Medicare Hospital Insurance (HI), Social Security, and Highway spending. CBO now projects the HI trust fund will deplete its reserves in Fiscal Year (FY) 2030, the Social Security Old-Age and Survivors Insurance (OASI) trust fund will be insolvent in FY 2033, and the Highway Trust Fund will be insolvent in FY 2027. In FY 2032, these trust funds – plus Social Security Disability Insurance – will run a combined $560 billion deficit (1.5 percent of Gross Domestic Product).
Insolvency dates improved slightly compared to last year, largely due to increased payroll tax revenues resulting from a strong employment recovery and higher inflation, as well as the significant general revenue transfer to the Highway Trust Fund included in the Infrastructure Investment and Jobs Act passed last year. Because its insolvency is much farther off, CBO did not provide an estimated date for the Social Security Disability Insurance trust fund.
CBO's Projections of Major Trust Funds
|% Cut at Insolvency
|% Cut in FY 2032
|Deficit in FY 2032
|Medicare Hospital Insurance
|Social Security Old-Age and Survivors Insurance
|Social Security Disability Insurance
|Highway Trust Fund (combined)
(1.5% of GDP)
Source: Congressional Budget Office and Committee for a Responsible Federal Budget calculations. *CBO did not release an insolvency date for the disability trust fund, but the 2021 Social Security Trustees report estimated it to be in 2057. +The disability trust fund will run a surplus in 2032.
The Medicare HI Trust Fund
The Medicare HI trust fund makes payments to hospitals and providers of post-acute care services under Medicare Part A, and it pays for some of the cost of private Medicare Advantage health plans. It is largely funded by a 2.9 percent payroll tax (3.8 percent for certain high-income earners) but also receives income from premiums as well as taxes on Social Security benefits. The HI trust fund is separate from the Supplementary Medicare Insurance (SMI) trust fund, which covers benefits for Medicare Parts B and D, including outpatient services, physician-administered prescription drugs, and outpatient prescription drugs. SMI is largely funded by premiums and general revenue, unlike HI, so it does not face the same solvency concerns.
In July 2021, CBO projected that the HI trust fund faced a cumulative shortfall of $578 billion through the decade and would exhaust its reserves sometime in FY 2027 – likely near the beginning – under current law. CBO's latest projections show a lower ten-year shortfall at about $286 billion and estimate insolvency will occur in FY 2030. Upon insolvency, there will be a deficit of $49 billion, resulting in an 8 percent cut in spending. The delay in trust fund exhaustion is due to both increased payroll tax revenues and reduced projected spending reflective of projected 2-percent lower enrollment due to increased mortality rates from the COVID-19 pandemic.
The Social Security Trust Funds
Social Security is the largest federal spending program, distributing over $94 billion in monthly benefits to nearly 65 million beneficiaries. Benefits are paid through the Old-Age and Survivors Insurance (OASI) trust fund and Disability Insurance trust fund, which are both primarily funded by the 12.4 percent payroll tax. Projections concerning the OASI trust fund have only slightly changed due to projected incomes and projected spending increasing by similar amounts. Revenue is up due to higher projected wages and salaries while spending is up due to higher inflation (somewhat offset by lower enrollment). The trust fund is projected to record annual deficits of $466 billion by 2032, with the remaining $180 billion in reserves being fully depleted in 2033. Upon insolvency, the program will have a deficit of about $520 billion, resulting in a benefit cut of 25 percent.
Given that Social Security will only be able to pay full benefits for the next decade, substantial changes will need to be made to bring spending and revenue in alignment. We put together ten options to secure the Social Security trust fund, a pro-growth Social Security reform framework, and our Social Security Reformer tool to help visualize the choices needed to maintain Social Security solvency.
The Highway Trust Fund
The Highway Trust Fund supports road construction, mass transit, and other surface transportation projects. It is largely funded by the current 18.4-cents-per-gallon gas tax (and 24.4-cents-per-gallon diesel tax), which has been frozen at the same amount since 1993. Meanwhile, highway spending has been increasing at the rate of inflation or faster, resulting in a growing structural imbalance between spending and revenue.
Before the enactment of the Infrastructure Investment and Jobs Act (IIJA), CBO projected the Highway Trust Fund to be insolvent in 2022. The infrastructure law contains a one-time general revenue transfer of $118 billion, which extended solvency for another five years. This matches the projection we made following the law's passage last year. The ten-year shortfall for the trust fund will be $217 billion, and highway spending will be cut by 45 percent immediately upon insolvency – a much larger cut than last year since IIJA increased spending without increasing dedicated revenue.
The Highway Trust Fund will require changes to bring dedicated revenue and spending in line, which could include new revenue sources like a vehicle-miles traveled tax or a carbon tax, reductions in federal highway spending, or a combination of both.
With the major trust funds approaching insolvency, policymakers should enact policies to decrease spending, increase revenues flowing into the trust funds, or a likely combination of the two. Fixing the trust funds could be one avenue to ultimately stabilize the national debt; in the near future, we will be publishing an analysis on TRUSTGO, which we estimated in the past would fully stabilize the debt. We hope Congress will commit to improving solvency through honest and comprehensive trust fund solutions to avoid drastic cuts or last-minute irresponsible solutions. The closer insolvency approaches, the more difficult addressing it will be.