Background on funding challenges

Background on funding challenges

Medicare & Social Security

is funded through payroll taxes known as FICA levied according to the . Employers and employees are responsible for making equal FICA contributions. During 2009, Social Security taxes were levied on the first $106,800 of income for employment; amounts earned above that are not taxed. Covered workers are eligible for and benefits. If a covered worker dies, his or her spouse and children may receive survivors' benefits. Social Security accounts are not the property of their beneficiary and are used solely to determine benefit levels. Social Security funds are not invested on behalf beneficiaries. Instead, current receipts are used to pay current benefits (the system known as " "), as is typical of some insurance and defined-benefit plans.

In each year since 1983, tax receipts and interest income have exceeded benefit payments and other expenditures, most recently (in 2009) by more than $120 billion. However, this annual "surplus" is expected to change to a deficit around 2015, when payments begin to exceed receipts and interest thereafter. The fiscal pressures are due to trends, where the number of workers paying into the program continues declining relative to those receiving benefits. The number of workers paying into the program was 5.1 per retiree in 1960; this declined to 3.3 in 2007 and is projected to decline to 2.1 by 2035. Further, life expectancy continues to increase, meaning retirees collect benefits longer. Federal Reserve Chairman Bernanke has indicated that the aging of the population is a long-term trend, rather than a proverbial "pig moving through the ."

The accumulated surpluses are invested in special non-marketable (treasuries) issued by the U.S. government, which are deposited in the . At the end of 2009, the Trust Fund stood at $2.5 trillion. The $2.5 trillion amount owed by the federal government to the Social Security Trust Fund is also a component of the , which stood at $13.3 trillion as of August 2009. By 2019, the government is expected to have borrowed nearly $3.8 trillion against the Social Security Trust Fund.^[18]

The CBO projected in 2010 that an increase in payroll taxes ranging from 1.6%-2.1% of the payroll tax base, equivalent to 0.6%-0.8% of GDP, would be necessary to put the Social Security program in fiscal balance for the next 75 years.^[19] In other words, raising the payroll tax rate to about 14.4% during 2009 (from the current 12.4%) or cutting benefits by 13.3% would address the program's budgetary concerns indefinitely; these amounts increase to around 16% and 24% if no changes are made until 2037. The value of unfunded obligations under Social Security during FY 2009 was approximately $5.4 trillion. In other words, this amount would have to be set aside today such that the principal and interest would cover the shortfall over the next 75 years. Projections of Social Security's solvency are sensitive to assumptions about rates of economic growth and demographic changes.

Because Social Security receipts currently exceed payments, the program also reduces the size of the annual federal budget . For example, the budget deficit would have been $182 billion higher in 2007 (i.e., $344 billion rather than $162 billion published) if Social Security were accounted for separately from the overall budget.

Increasing unemployment due to the of 2008-2010 has significantly reduced the amount of payroll tax income that funds Social Security. Further, the crisis also caused more to apply for both retirement and disability benefits than expected. During 2009, payroll taxes and taxation of benefits resulted in cash revenues of $689.2 billion, while payments totaled $685.8 billion, resulting in a cash surplus (excluding interest) of $3.4 billion. Interest of $118.3 billion meant that the Social Security Trust Fund overall increased by $121.7 billion (i.e., the cash surplus plus interest). The 2009 cash surplus of $3.4 billion was a significant reduction from the $63.9 billion cash surplus of 2008.

The wrote in 2010: "The 75-year Social Security shortfall is about the same size as the cost, over that period, of extending the 2001 and 2003 tax cuts for the richest 2 percent of Americans (those with incomes above $250,000 a year). Members of Congress cannot simultaneously claim that the tax cuts for people at the top are affordable while the Social Security shortfall constitutes a dire fiscal threat