CBO Projects Medicare Trust Fund Will Be Exhausted by 2040, Twelve Years Earlier Than Previously Estimated

Details

On February 23, 2026, the Congressional Budget Office published updated projections showing that Medicare's Hospital Insurance (HI) Trust Fund will be entirely exhausted by 2040. This represents a dramatic acceleration from the CBO's previous estimate, published in March 2025, which projected the fund would remain solvent through 2052. In a single year, the projected lifespan of the fund that pays for Medicare Part A—covering inpatient hospital care, skilled nursing facilities, home health care, and hospice—has been shortened by twelve years.

What Changed

The CBO identified three main reasons for the deterioration, all on the income side of the ledger.

Tax law changes under the One Big Beautiful Bill Act. The 2025 reconciliation act (Public Law 119-21), signed by President Trump on July 4, 2025, is the primary driver. The law lowered individual tax rates, permanently extended the 2017 Tax Cuts and Jobs Act provisions, and created a temporary $6,000 deduction for taxpayers age 65 and older (per individual, through 2028). These changes significantly reduced the amount of revenue the HI trust fund receives from income taxes on Social Security benefits—a revenue stream that historically provides roughly one-eighth of the fund's annual income. The senior deduction has been widely used: a Washington Post one-year assessment of the law reported that more than 35 million taxpayers claimed it in the 2025 tax year, its first year in effect.

According to the Committee for a Responsible Federal Budget (CRFB), the 25-year actuarial shortfall for the HI trust fund has more than doubled, from 0.13% of payroll in the 2025 estimate to 0.30% of payroll in the current projection, with the increase largely attributable to the One Big Beautiful Bill Act.

Lower projected payroll tax revenues. The CBO also revised its models downward to account for lower expected worker earnings, reducing the amount of payroll tax revenue flowing into the fund.

Compounding interest losses. Because the fund will now carry smaller balances going forward, it will earn less interest income on the government securities it holds, creating a negative feedback loop.

On the spending side, the CBO noted that per-enrollee spending in Medicare Part A's fee-for-service program in 2025 and Medicare Advantage plan bids for 2026 both came in higher than expected. Demographic pressures—more Americans aging into Medicare while fewer workers pay into the system—are also accelerating costs.

What Happens If the Fund Runs Out

The HI trust fund currently covers approximately 70 million elderly and disabled Americans. Under federal law, Medicare cannot spend more than the fund takes in. If the trust fund is exhausted and no legislative action is taken, total payments to hospitals, nursing facilities, and other providers would be automatically restricted to match incoming revenue.

The CBO estimates these benefit reductions would begin at 8% in 2040 and rise to 10% by 2056. The agency noted it remains unclear how the Centers for Medicare & Medicaid Services would manage the program under those constraints.

Even More Pessimistic Estimates Exist

The CBO's 2040 projection is actually more optimistic than the separate analysis conducted by the Medicare Board of Trustees. The Trustees' most recent estimate projects the fund will be insolvent by 2033. The CRFB estimates that under the Trustees' methodology, insolvency would arrive around 2032, with payment cuts of 12%.

The CBO's projections also do not account for any economic or budgetary effects from the Supreme Court's February 20, 2026 ruling on tariffs (Learning Res., Inc. v. Trump), which could further affect the fiscal outlook.

Social Security Faces a Similar Timeline

The CBO's February 2026 baseline also projects that Social Security's Old-Age and Survivors Insurance (OASI) Trust Fund will be depleted by 2032—one year earlier than the 2033 date projected in 2025. If Congress does not act, Social Security benefits would face automatic cuts averaging 28% in the years after insolvency, according to the CBO.

The CRFB estimates that a typical couple turning 60 today who retires at the point of insolvency would face an approximately $18,400 annual reduction in benefits. Both the Social Security and Medicare shortfalls are driven in part by the same mechanism: the One Big Beautiful Bill Act's tax provisions reduced revenue from the income taxation of Social Security benefits, which flows into both the Social Security and Medicare trust funds. The CRFB estimated in June 2025, before the bill was signed, that the legislation would reduce total taxation of benefits by roughly $30 billion per year.

The One Big Beautiful Bill Act

The One Big Beautiful Bill Act (Public Law 119-21) was signed into law on July 4, 2025, after passing the Senate 51–50 with Vice President JD Vance casting the tiebreaking vote and the House 218–214, with universal Democratic opposition in both chambers.

The law contains hundreds of provisions. In addition to the tax changes affecting Medicare and Social Security revenue, it permanently extends the individual tax rates from the 2017 Tax Cuts and Jobs Act, creates deductions for tips, overtime pay, and auto loan interest, raises the state and local tax (SALT) deduction cap to $40,000, and establishes tax-deferred "Trump Accounts" for children born between 2025 and 2028. The Joint Committee on Taxation estimates the law's tax provisions will add $3.5 trillion to federal deficits over the next ten years; as of the law's first anniversary, the Washington Post reported that the CBO projects the law as a whole will increase deficits by $4.2 trillion over the next decade.

The law also includes significant reductions to Medicaid—roughly $1 trillion over a decade, per the Post—including work requirements for adult enrollees, a five-year waiting period for green card holders, restrictions on state financing, and a one-year prohibition on Medicaid funding for Planned Parenthood and similar organizations. The OBBBA did not extend enhanced premium tax credits for Affordable Care Act marketplace plans, which expired at the end of 2025 and were followed by sharply higher marketplace premiums for 2026.

One Year Later: Front-Loaded Benefits, Back-Loaded Costs

On the law's first anniversary, a Washington Post assessment found a fiscal pattern that mirrors the trust fund story: the law's tangible benefits arrived quickly, while its costs—both the spending cuts that partially pay for it and the revenue losses eroding the Medicare and Social Security trust funds—accumulate later. Average tax refunds in the 2025 filing season rose more than 11% to $3,275, a short-term stimulus that helped offset price increases in gas and groceries triggered by the war in Iran. The new deductions were heavily claimed: more than 35 million taxpayers took the senior deduction, more than 29 million claimed the overtime deduction, and more than 7.5 million claimed the tips deduction (all three expire at the end of 2028).

The offsetting cuts, by contrast, are only beginning to take effect. Medicaid's new 80-hour-per-month work and community-service requirements for most enrollees under 65 begin in January 2027—after the midterm elections. The CBO estimated in August 2025 that the work requirements alone would add 5.3 million people to the ranks of the uninsured by 2034, and that the law's health provisions collectively would push 10 million people off insurance by that year; KFF's Elizabeth Williams called it the "largest rollback in federal support for health coverage ever," per the Post. The CBO separately projected in February 2026 that the law's SNAP provisions—expanded work requirements, citizen-only eligibility, and a state matching-funds requirement—will cut food assistance by $211 billion through 2035 and reduce participation by roughly 2.4 million people in an average month.

John Ricco of the Yale Budget Lab told the Post the early benefits amount to a "sugar high": the law delivers "benefits in the short term and kick[s] the can down the road in terms of paying for it fiscally or macro-economically." The CBO had expected the law to spur stronger growth in 2026, but that estimate did not account for the war with Iran, which spiked inflation; growth is now expected to come in much lower for the year. The White House defended the law's trajectory: spokesman Kush Desai said it "is simultaneously delivering short-term economic relief while laying the groundwork for long-term economic growth."

Trump's Pledge to Protect Medicare

During his State of the Union address in late February 2026, President Trump stated: "Under this administration, we will always protect Social Security and Medicare … We will always protect Social Security, Medicare, Medicaid." He also criticized Democrats for voting against the One Big Beautiful Bill Act.

These statements came days after the CBO published projections showing both trust funds facing significantly accelerated insolvency timelines, driven largely by the OBBBA's tax provisions.

Expert Analysis

The CRFB, a nonpartisan fiscal policy organization, identified several policy options to address the shortfall, including adopting site-neutral Medicare payments, reducing Medicare Advantage overpayments, lowering prescription drug costs, and restricting Medicaid financing arrangements. The organization warned that "lawmakers should take action sooner rather than later to slow the growth of health care spending, reduce deficits, and restore trust fund solvency."

Healthcare Dive reported that experts say legislators need to act soon given that many reforms to stabilize Medicare could take several years to go into effect. Congress has never allowed Medicare's trust fund to run dry, but the combination of accelerated timelines and political gridlock has raised concerns among budget analysts, Medicare advocates, and physician organizations.

Broader Fiscal Context

The CBO's February 2026 Budget and Economic Outlook projects that federal health care spending—on Medicare, Medicaid, ACA subsidies, and CHIP combined—will grow from $1.8 trillion in 2025 to $3.1 trillion by 2036. Health care is now the largest single category of federal spending, exceeding Social Security, defense, or interest on the debt.

Federal debt held by the public is projected to surpass the post-World War II record of 106% of GDP by 2030 and reach 120% of GDP by 2036. In its February 2026 outlook, the CBO estimated the reconciliation law alone would add $4.7 trillion to the national debt over the budget window, partially offset by $3 trillion in projected tariff revenue; by mid-2026, the Washington Post cited a CBO estimate that the law will increase deficits by $4.2 trillion over ten years, and the national debt has since passed $39 trillion.