Saving Medicare and Social Security May Require Large Payroll Tax Increases

July 24, 2015

This week's Trustee reports on the Medicare and Social Security trust funds anticipate that both will be depleted in the next 20 years unless payroll tax rates are immediately increased by over 20 percent or benefits are significantly reduced.  According to the Medicare trustees, by 2030 the hospital trust fund will be depleted and provider payments will have to be reduced by 14 percent unless payroll tax rates are immediately increased by 23 percent, from 2.9 percent of payroll to about 3.6 percent.  Social Security's Disability trust fund will be depleted in 2016, and will require some congressional action in an election year in order to maintain benefit levels, while the retirement trust fund will be depleted in 2035.  In order for the combined disability and retirement trust funds to be solvent, payroll tax rates would have to be immediately increased by 21 percent, from 12.4 percent of payroll to 15.0 percent, or benefits would have to be reduced for all current and future beneficiaries by 16.4 percent, or some combination of the two.  Both reports also note that the longer it takes Washington to act the higher the payroll tax increases will have to be.