Medicare Running Deficit; Social Security to Follow By 2016

May 13, 2009

Joseph Bishop-Henchman

Joseph Bishop-Henchman

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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A tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.

Inflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power.

Withholding is the income an employer takes out of an employee’s paycheck and remits to the federal, state, and/or local government. It is calculated based on the amount of income earned, the taxpayer’s filing status, the number of allowances claimed, and any additional amount of the employee requests.

A payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue.