CBO's Budget Options to Improve Trust Fund Solvency

The Congressional Budget Office (CBO) recently published its latest Options for Reducing the Deficit reports, outlining 76 policy options across two reports and their impact on the federal budget over ten years. This includes numerous Medicare reform options presented by CBO's Carrie Colla and Chapin White at the Committee for a Responsible Federal Budget's Health Solutions Summit last month (see their presentation here). Among CBO's budget options, we identify 27 policy changes – including changes to spending and revenue – that could meaningfully improve the solvency of the Medicare Hospital Insurance (HI) trust fund, the Social Security trust funds, or the Highway Trust Fund.

CBO currently projects Highway Trust Fund depletion by 2027, Medicare HI trust fund insolvency by 2030, and Social Security trust fund exhaustion by 2033. Current law dictates that trust fund spending cannot exceed dedicated revenue once there are no trust funds reserves; so upon exhaustion, Social Security benefits are slated to be cut across the board by 23 percent while HI spending by 10 percent and highway spending by 45 percent. Adopting some of the options presented in CBO's report would not only delay or avoid looming insolvency but could also help to improve economic growth and help put the debt on a more sustainable long-term path

We identified 11 policies that could significantly improve the Medicare HI trust fund, and we estimated their impact on the trust fund based on CBO's overall budget score. On the revenue side, increasing the Medicare payroll tax by 1 percentage point could close the HI funding gap twice over in 2032, while eliminating the discrepancy between the Self-Employed Contributions Act (SECA) taxes and the net investment income tax (NIIT) could close two-fifths of the gap. Both of these options would have a smaller relative effect over time as Medicare costs grow. On the spending side, CBO's options include changes to reduce excess payments to Medicare Advantage, reform cost-sharing and Medigap rules, cut federal reimbursements for unpaid "bad debts," and consolidate Graduate Medical Education (GME) funding for residents and teaching hospitals into a single grant program. Individually, we estimate these options could close 4 to 44 percent of the 2032 funding gap; taken together, they could be large enough to more than close the gap.

Options for Improving Medicare Trust Fund Solvency

Policy Option Ten-Year Unified Savings Ten-Year HI Savings* Percent of 2032 Gap Closed
Medicare Hospital Insurance Trust Fund    
Impose a payroll tax of 1 percent on earnings  $1,136 billion $1,300 billion 213%
Expand the base of the Net Investment Income Tax $249 billion $249 billion** 40%
Reduce Medicare Advantage benchmarks by 10 percent $392 billion $190 billion 44%
Consolidate GME payments, index to CPI minus 1% $81 billion $81 billion** 21%
Consolidate GME payments, index to CPI $68 billion $68 billion** 18%
Reform Medicare cost sharing & restrict Medigap plans^ $122 billion $100 billion 21%
Restrict the use Medigap insurance^ $100 billion $60 billion 13%
Reform Medicare cost sharing^  $27 billion $40 billion 8%
Eliminate Medicare's coverage of bad debt  $74 billion $55 billion 12%
Reduce Medicare's coverage of bad debt to 25 percent $46 billion $35 billion 7%
Reduce Medicare's coverage of bad debt to 45 percent $23 billion $15 billion 4%

Sources: Congressional Budget Office, Committee for a Responsible Federal Budget, and Medicare Actuary. *HI savings are rounded estimates from CRFB using our best estimate of the share of savings that would accrue to the HI trust fund as opposed to other parts of Medicare, the federal budget, or the tax code. **Estimate assumes exactly all savings would be dedicated to the Medicare HI trust fund. ^These options would replace current cost-sharing rules for Medicare Parts A and B with an $850 combined deductible, a 20 percent coinsurance, and an out-of-pocket cap of $8,500 annually and/or restrict how much cost sharing could be covered by supplemental Medigap plans. Our estimates of the HI savings are particularly rough, as there are substantial interactions.

CBO also offers 11 policies that could extend solvency for the Social Security trust fund. On the revenue side, CBO includes two options to adjust the $160,200 taxable maximum, closing 20 to 42 percent of the program's funding gap in 2032 (but less over time). Covering all newly-hired state and local government workers would close 5 percent of the 2032 gap (but very little over time, as benefits were paid to those workers).

On the benefit side, CBO shows that 75-year solvency could be fully restored by replacing the current formula with a flat benefit set between 125 and 150 percent of poverty. Alternatively, solvency could be restored through a combination of other benefit changes. Making the existing formula more progressive for the top 30 to 50 percent of seniors could close 15 to 35 percent of Social Security's funding gap. Raising the full retirement age, calculating cost-of-living adjustments (COLA) with a more accurate measure of inflation, or requiring disability applicants to have worked more in recent years could further improve solvency. Many options like these can be selected in our Social Security Reformer tool.

Options for Improving Social Security Trust Fund Solvency

Policy Option Ten-Year Savings Percent of 2032 Gap Closed Percent of 75-Year Solvency Gap Closed
Social Security Trust Funds     
Eliminate taxable maximum above $250,000 of wages $1,204 billion 42% *
Increase taxable maximum to cover 90 percent of wages  $670 billion 20% *
Include all newly hired state and local government workers in Social Security  $132 billion 5% *
Adopt a flat benefit at 125 percent of poverty  $593 billion 39% 118%
Adopt a flat benefit at 150 percent of poverty  $270 billion 19% 88%
Slow benefit growth above 50th percentile (phased in by 2028)  $184 billion 14% 35%
Slow benefit growth above 50th percentile (phased in by 2032)  $109 billion 9% 35%
Slow benefit growth above 70th percentile (phased in by 2032)  $40 billion 3% 15%
Use chained CPI to index Social Security COLAs  $175 billion 9% *
Raise full retirement by two months per year to 70 $121 billion 10% *
Require most SSDI applicants to work four of the last six years  $57 billion 3% *

Sources: Congressional Budget Office and Committee for a Responsible Federal Budget. *Solvency estimate not included.

Finally, CBO's reports include 5 options that could improve the Highway Trust Fund. On the revenue side, applying a carbon tax of $25 per metric ton could close half to two-thirds of the 2032 gap, assuming the portion of the tax from gasoline went toward the trust fund. We estimate that increasing gas and diesel tax rates by 15 cents per gallon and indexing the taxes to inflation would close 84 percent of the 2032 funding gap. On the spending side, reducing transportation grants by one-third would close 57 percent of the 2033 gap, and repealing the Davis-Bacon Act, which establishes wage requirements on federally-funded construction projects, would close about 2 percent of the 2032 gap. Importantly, if policymakers allow temporary enhancements from the 2021 bipartisan infrastructure law to expire as scheduled, the carbon tax would close 63 to 80 percent of the 2032 gap, the gas tax hike would close 108 percent, reducing transportation grants would close 74 percent, and repealing Davis-Bacon would close 3 percent. 

Options for Improving Highway Trust Fund Solvency

Policy Option Ten-Year Unified Savings Ten-Year Highway Savings Percent of 2032 Gap Closed
Highway Trust Fund     
Enact $25 per metric ton carbon tax, 5 percent real growth $865 billion $225 billion 62%
Enact $25 per metric ton carbon tax, 2 percent real growth $769 billion $200 billion** 49%
Increase gas tax 15 cents per gallon, index to inflation $240 billion $320 billion* 84%
Reduce education and transportation grants by one-third  $332 billion $190 billion 57%
Repeal the Davis-Bacon Act $17 billion $10 billion 2%

Sources: Congressional Budget Office and Committee for a Responsible Federal Budget; highway savings and revenue are rounded and percents are based on CBO's baseline assuming extension of enhancements in the bipartisan infrastructure law. *Higher gas tax revenue reduces ordinary payroll and income tax revenue. **Assumes portion of carbon tax that applies to gasoline is dedicated to the Highway Trust Fund.

Many of CBO's options match or resemble those that we have previously published to secure the Medicare, Social Security, and Highway trust funds. 

Policymakers should act soon to address the impending insolvency of the nation's major trust funds, and CBO's options should serve as a great starting point for figuring out how to do so. Thoughtful trust fund solutions could greatly improve the nation's economic and fiscal outlook while securing these important programs for future generations.

Note: Analysis was corrected on 1/25 to attribute GME savings dollar-for-dollar to the HI trust fund.