President Joe Biden’s 2024 proposed budget includes plans to shore up the finances of Medicare, the federal health insurance program that covers Americans who are 65 and up and some younger people with disabilities.

His administration aims to increase from 3.8% to 5% an existing Medicare tax that’s collected on the labor and investment earnings of Americans who make more than US$400,000 annually. It also aims to reap some savings from having the government negotiate prices on more prescription drugs.

The White House projects that these changes would generate an additional $650 billion in revenue over a decade. Some independent experts concur.

As economists who have long researched the Medicare and Social Security programs, we believe the president’s proposal is an important first step in opening the necessary debate on strengthening Medicare’s finances.

Medicare consumes more than 15% of the federal budget. The program cost $975 billion in 2022, out of the government’s $6.5 trillion in total federal spending.

As anyone who has enrolled in it can tell you, the program itself is rather complicated. It’s divided into three parts, known as A, B and D, each of which relies on revenue from a different mix of sources.

Medicare Part A covers care delivered at hospitals and nursing homes, as well as home health care. Part B pays for doctor’s visits and outpatient procedures, and Part D pays for prescription drugs. There’s also Part C, a private insurance option, known as Medicare Advantage. However, its costs are included in the accounting for Parts A and B.

Part A is primarily funded by a 1.45% Medicare payroll tax on both employees and employers. When that tax and the program’s other tax revenues don’t raise enough money to cover Part A’s costs, the program dips into the Medicare Hospital Insurance trust fund to make up the difference. The trust fund, amassed from past surplus payroll taxes, currently stands at around $143 billion.

Without spending cuts, funding increases or a combination of the two, the Medicare program’s trustees have predicted in their annual report that the Medicare trust fund will be exhausted by 2028. The trustees are the secretaries of the Treasury, Labor and Health and Human Services departments, plus the Social Security commissioner. There can be up to two additional trustees, but those seats are vacant.

Medicare’s expenses are rising rapidly with the retirement of baby boomers, the large generation of Americans born between 1946 and 1964, and rising health care costs.

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