Medicare Running Deficit; Social Security to Follow By 2016

May 13, 2009

The trustees of Social Security and Medicare put out their annual report this week on the financial status of the two government programs. Medicare will be in the red this year, paying out more in benefits than it receives in tax revenue. (All Americans pay a 2.9% Medicare tax on their wages, half remitted by the employer and the other half withheld from the employee’s paycheck.) Social Security is still in the black but is expected to enter the red in 2016. (Americans pay a 12.4% Social Security tax on their wages up to an inflation-adjusted cap each year, again half remitted by employer and half withheld from paychecks.)

Notwithstanding the mountain of government IOUs both programs hold as assets, President Clinton once explained that there are only three options once these programs enter the red: (1) raise taxes, (2) cut benefits, or (3) get a better rate of return. The trustees say that balancing Social Security’s books would require a payroll tax of 14.4%, a 16% increase, if no promised benefits are cut. Medicare would require a 6.78% tax rate, a 134% increase, if no promised benefits are cut.

Taken together, fixing these programs’ budgets through tax increases would require a payroll tax of 21.18% before federal or state income taxes. For someone earning the federal minimum wage of $7.25 per hour ($15,080 per year), that’d be $1,500 gone from their paycheck in withholding!

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