“The Medicare program has two separate trust funds—the Hospital Insurance (HI) Trust Fund, which finances Part A, and the Supplementary Medical Insurance (SMI) Trust Fund, which finances Parts B and D. (Part C payments are made in appropriate parts from both the HI and SMI Trust Funds.) Both funds are maintained by the Department of the Treasury and overseen by a Board of Trustees, which reports annually to Congress.

“Similar to Social Security, the HI portion of Medicare was designed to be self-supporting and is financed through dedicated sources of income. The primary source is payroll taxes paid by employees and employers; each pays a tax of 1.45% on earnings. An additional tax of 0.9% is imposed on high-income workers. There is no upper limit on earnings subject to the tax. Payroll taxes paid by current workers and their employers are used to pay Part A benefits for today’s Medicare beneficiaries. (See Figure 2.)

“Unlike the HI portion of Medicare, SMI (Parts B and D) was not intended to be supported through dedicated sources of income. Instead, it relies primarily on general tax revenues and beneficiary premiums as revenue sources.

“From its inception, the HI Trust Fund has faced a projected shortfall and eventual insolvency. The insolvency date has been postponed a number of times, primarily due to legislative changes that have had the effect of restraining growth in program spending. The 2019 Medicare Trustees Report projects that the HI Trust Fund will become insolvent in 2026. Because of the way it is financed, the SMI Trust Fund cannot become insolvent; however, the Medicare trustees continue to express concerns about the rapid growth in SMI costs.”

Source: U.S. Congressional Research Service. In Focus: Medicare Overview (IF10885; August 8, 2019). https://crsreports.congress.gov/product/pdf/IF/IF10885