Social Security and Medicare Funding Status

Kirk Kreikemeier |

Social Security and Medicare are very important programs.  Those currently receiving Social Security benefits appreciate the monthly income that grows with inflation and continues as long as they live.  The Medicare program provides health coverage during potentially vulnerable times.  For those wondering if the programs will be around when they retire, the answer is yes, but benefits may be reduced and/or additional taxes required.  This post will provide a financial overview of these programs in a Q&A format.

Those looking for a short summary if no changes are made to the programs – here are 3 bullet points and 2 graphs.  Following that are more details for context and understanding of these very important programs.

  • Social Security can cover 100% of promised benefits to year 2034, then only cover 80% of promised benefits
  • Medicare Part A can cover 100% to year 2031, then 89% of promised benefits
  • Medicare Part B and D is fully funded since financed by premiums and general tax revenue – but % required from general revenue is growing quickly

Before I begin with details, there are two important documents I encourage you to become familiar with:

  1. Social Security Statement – available at  - provides an estimate of your monthly benefit based on earnings history.  Annual mailing of statements stopped in 2011 (may receive in mail if over age 60 and not registered online).
  2. Annual Trustee Report – available at - shows the financial health of both programs and actuarial projections.  The latest report was released March 31, 2023 with useful information and the main source for this blog, both the Summary and 2023 Trustees Report (276 pages) for those who want details!

Q1 - What programs are included in Social Security and Medicare and what is funding status?

Social Security and Medicare are social insurance programs that provide benefits for individuals or family members for those workers who satisfy the number of years worked (and paid taxes) requirement.  There are two programs under Social Security and two under Medicare, each with their own financial status, though it is common to refer to them simply two programs.

Social Security (OASDI)

  • Old-Age and Survivors Insurance (OASI) – pays retirees and survivors
    • Benefits covered 100% to 2033, then 77% (’22 - 2034, 77%)
  • Disability Insurance (DI) – pays those unable to work due to disability
    • Benefits covered 100% over next 75-year projection period
  • NOTE:  combined OASDI 100% covered to 2034, then 80% (’22 - 2035, 80%)

Medicare (Part A, B, D)

  • Hospital Insurance (HI) – Medicare Part A (inpatient hospital care)
    • Benefits covered 100% to 2031, then 89% (’22 - 2028, 90%)
  • Supplemental Medical Insurance (SMI) – Medicare Part B (physicians, outpatient care) and Medicare Part D (prescription drugs)
    • Benefits covered 100% into future; just raise premiums; no FICA tax

Q2 - Who pays for Social Security and Medicare?

You do – either from payroll tax or general tax revenue, plus direct premiums if on Medicare.  Current workers contribute a portion of their paycheck for the first three programs above - sometimes called “payroll tax” or “FICA tax”.  Your employer also pays the same tax; the self-employed pay the full 15.3%.  The 6.20% OASDI tax applies to income up to $160,200 (for 2023) but the 1.45% Medicare tax is paid on all income.  There is an additional 0.9% Medicare tax for the employee only if income is above $200,000 for individuals and $250,000 for joint filers that started in 2013 to help fund part of Affordable Care Act (not shown in table below).  Also note the $200k and $250k is NOT indexed for inflation, catching more workers each year with wage inflation.

                                  Table 1: 2022 PAYROLL TAX RATES (in percent)

Medicare Part B and Part D is funded from two sources – about 75% comes from general revenue of our generous taxpayers and 25% comes from monthly premiums by retirees.  That’s right – the monthly Medicare premiums only cover 25% of the true cost.  Medicare Part B monthly premium = $164.90/month; Part D base premium = $32.74/month but is then adjusted up or down depending on specific drug coverage you select.  Additional tiered premiums for Part B and D are required for high income retirees (in 2023 – if Modified Adjusted Gross Income above $97,000 for individual filers; $194,000 for joint filers – more details later).

Q3 - Does each worker have their own account where the payroll taxes go until they retire?

No.  Unlike your 401k account or savings account, Social Security and Medicare Part A use “pay-as-you-go funding”.  This means payroll taxes collected by current workers are used to pay the bills for existing retirees.  When existing workers retire, the next generation of workers will be paying their bills.  Yes, the number of workers relative to the number of retirees changes over time and impacts the financing. The Social Security and Medicare actuaries project the expected financial impact on these changing demographics, but the tough part is convincing politicians and the public to make the tough choices now to assure long-term funding.

Q4 - What happens to the extra payroll tax not needed to pay current benefits?

This is where the Trust Funds come in.  Earlier when incoming payroll tax exceeded outgoing benefits, the excess was earmarked into Trust Funds and invested in Treasuries (non-marketable securities – so only a bookkeeping entry).  Later when payroll tax revenue was lower than outgoing benefits (which has occurred since 2010) the difference was made up by drawing down the Trust Funds.  Technically the Trust Funds are simply IOU’s from the government but that is a separate, complex topic.  It is the year these Trust Funds are projected to go to $0 and the % of promised benefits covered thereafter that summarizes the health of the programs (refer to intro).

Q5 - So how soon will the Trust Funds hit $0?  Then what happens?

Soon!  The Old-Age and Survivor Trust Fund is projected to hit $0 in 2033 at which time only current payroll tax will be available to pay 77% of promised benefits.  The combined OASDI Trust Funds would hit $0 in 2034 and then cover 80% of promised benefits.  Medicare Hospital Insurance Trust Fund (Part A) is projected to run out in 2031 when current payroll tax is projected to cover 89% of promised benefits.  Where is the Trust Fund for Medicare Supplementary Medical Insurance (Part B and D) you ask?  It is never projected to be depleted since financing the SMI is set to meet expected costs, again 25% from increasing Medicare premiums and 75% from taxpayer generosity.  These OASDI projections are slightly worse than last year due to lower projected GDP and productivity.  The HI projections are slightly better due to projected lower spending costs on health care (details were not provided!).

Q6 - Wait a minute.  Tell me about Medicare funding again?

Only the Hospital Insurance (Part A) is funded by payroll taxes (see red area in graph below). The Supplementary Medical Insurance (Part B and D) has about 25% funding from Medicare premiums (green area) and most of the other 75% from general taxing revenue (grey area) and taxes on Social Security benefits (blue area).  That is why Medicare Part B premiums seem so reasonable.  What is staggering is the projected cost as a % of GDP for the overall program – going from 2% in mid-90’s to about 4% today to over 6% by around 2050!

The majority of that expanded cost is projected to be covered by general tax revenue based on current law – not payroll taxes or dedicated premiums.  In fact, the law requires Trustees to trigger a “Medicare funding warning” if general revenue is projected to exceed more than 45% of total projected costs in any of the next seven years.  This has happened for seven consecutive years.  The President must submit proposed legislation to Congress to respond to the warning “on an expedited basis”.  I mentioned seven consecutive years, right?