NCPA - National Center for Policy Analysis

Social Security's Sorry State

April 15, 2002

Tax rates to fund Social Security and Medicare will become astronomical, according to the annual report of the Trustees of the Social Security and Medicare Trust Funds. Beginning in 2016 for Medicare and 2017 for Social Security, taxpayers will have to come up with additional money above and beyond current payroll tax revenues.

Because Social Security and Medicare are pay-as-you-go programs, taxpayers will receive no help from the so-called trust funds, which are only accounting devices that hold IOUs the government has written to itself.

"Pay as you go" means taxes taken from today's workers primarily pay benefits to today's retirees. Thus, as the number of retirees grows faster than the number of workers, today's workers' retirement benefits will be paid only if higher taxes are collected from the next generation. How high will those taxes be?

Based on the Trustees' intermediate (most likely) projections:

  • When today's 19-year-olds retire beginning in 2050, workers will face a payroll tax of 17 percent to pay Social Security retirement and disability benefits, currently funded by a 12.4 percent tax.
  • If Medicare Part A (which mainly covers hospital expenses) is added, the payroll tax burden will be 24 percent -- about a fourth of all income that workers will earn that year.
  • Although Medicare Part B (which mainly covers outpatient services) is funded from general revenues, expressed as a percent of payroll the burden will climb to 28 percent.
  • Add the other medical bills for the elderly the federal government pays (Medicaid, the Veterans Administration, etc.) and the total burden rises to 32 percent.

Thus almost one-third of future workers' incomes will be needed just to pay benefits to today's teenagers -- on top of all other government services, from national defense to salaries for teachers and police officers.

Furthermore, under the trustees' pessimistic projection, by 2050 the total taxes needed to support elderly benefits will climb to 53 percent of taxable payroll -- more than half of the incomes of future workers.

Most Social Security reform proposals would allow workers to invest a portion of their payroll taxes in a personal retirement account. The higher long-run rates of return offered by the capital markets would allow individual workers to earn more on their investment than Social Security pays. Over time, the personal accounts would grow, assuming an increasing portion of the government's Social Security burden.

Source: John C. Goodman And Matt Moore, "Analyzing the 2002 Social Security Trustees Report," NCPA Brief Analysis No. 394, April 15, 2002, NCPA.


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