Yes, Social Security and Medicare Do Impact the Debt

Mitch McConnell social security meme



Courtesy of Proud Democrat, with over 16,000 likes and 20,600 shares.  It was also published by Occupy Democrats, with over 22,000 likes and 21,000 shares.  This meme lambasts Senator McConnell for saying Medicare and Social Security are the biggest threats to our national debt, and claims that both programs are 100% funded and have zero impact on the national debt.  These claims are both wrong.  While the nuances of their funding aren’t likely studied in a high school civics class, they will be analyzed here.

FICA Deductions

The Federal Insurance Contributions Act requires withholding money from employees’ paychecks, which goes to pay for Social Security and Medicare.  Employees get 6.2% of their wages siphoned for Social Security, and 1.45% deducted for Medicare.  The social security tax stops after $118,500, while the Medicare withholding is unlimited (with an additional .9% for those making over $200,000/yr).  In addition, the employer is also required to match the employees contributions of 6.2% and 1.45%.  Therefore, the true cost (and the actual cost for those self-employed) is 12.4% for social security and 2.9% for Medicare, for a total of 15.3% of each person’s paycheck.

While these taxes do indeed go to pay for these programs, how exactly are Social Security and Medicare funded?

Social Security

Social Security is funded in 4 ways.

  1. FICA Deductions- these are the payroll taxes covered above.
  2. Taxation of SS Benefits- these are portions of the SS benefits that are taxed, depending on the tax liabilities of the recipients.  It’s not really “funding” the program, it basically means the government takes some of the benefits back, lessening the cost, but in an accounting sense it’s income.
  3. Interest Earnings- this is interest earned from the “trust fund“, which are US Treasury bonds claimed as an asset for Social Security.  While this shows up as income for accounting purposes, it’s misleading in any real sense.  This is because the interest on Treasuries must be paid for by the US government, which increases federal spending.  It would be like giving your child interest on his allowance, and then claiming those interest gains were separate from the family budget.  While it might seem like income from the child’s perspective, any interest comes from the parents’ pockets.
  4. Reimbursements from the General Fund- this is money from the federal budget.  Technically, it’s a reimbursement for the Social Security “trust fund”, but since that money has already been spent, the money must come from the overall budget.

Out of these four funding avenues, only the first two could be considered funding through FICA taxes and not impacting the greater federal budget.  According to the Social Security Administration, 88% of the program’s revenue in 2015 was supplied by the first two funding methods (85% by FICA, 3% by taxing benefits).  Interest income supplied 10% of the revenue, while general fund reimbursements were quite small.  This means Social Security is not entirely funded by FICA.  Out of the $897 billion in total expenditures, $827 billion came from FICA and taxes on benefits, leaving $70 billion which had to be covered outside of payroll taxes.

social security1.jpg

Note: OASI stands for Old-Age and Survivors Insurance and DI stands for Disability Insurance.  Both encompass Social Security.

While Social Security is currently not adding significantly to the deficit, this is expected to change in the future, which is likely the rationale behind Senator McConnell’s remarks.  Since 2010, Social Security has paid out more in benefits than it has collected in payroll taxes.  Even considering the $2.7 trillion trust fund, the program is expected to be insolvent by 2035, meaning even by the government accounting methods it will be adding to the debt if no changes are made.  The Board of Trustees projects an unfunded liability of $11.4 trillion over the next 75 years, which is certainly an issue for the national debt.

In order to keep the program solvent, the Congressional Budget Office says the withholding tax needs to be increased by nearly a third, from 12.4% to 15.9% (18.8% including Medicare)  This would mean an additional $1,750 in taxes for an employee earning $50,000.


Medicare is primarily funded in 3 ways:

  1. FICA Taxes- these are the payroll taxes covered above
  2. Beneficiary Premiums- these are paid by those who are enrolled in Medicare, and vary depending on things like income level.
  3. General Revenues- this comes from the federal budget.

sources of medicare revenue 2015As with Social Security, only the first two methods would be considered funded through FICA or user fees and not impact the overall debt.  Unlike Social Security, a significant portion of Medicare already comes from general revenues.

Payroll taxes and premiums only funded 50% of Medicare in 2015, with 42% coming from the federal budget.  This means both of the meme’s claims are inaccurate.  Medicare is not even remotely funded 100% by FICA, and it’s directly adding to the debt already.

The CBO projects that over the next 10 years, net Medicare spending (mandatory Medicare spending minus income from premiums and offsetting receipts) is expected to almost double, from $591 billion to $1.075 trillion.  Its share of the budget is expected to increase from 15.2% to 16.8%, while its share of GDP is expected to increase from 3.2% to 3.9%.

projected medicare spendingConclusion

Whatever one’s views are on Social Security or Medicare, it’s simply wrong to say they are fully paid for by payroll taxes and don’t affect the debt.  Particularly in the future, their unfunded liabilities are significant and will either need to be addressed by reducing benefits, raising taxes, or increasing the debt.

13 Comments on "Yes, Social Security and Medicare Do Impact the Debt"

  1. walter king | October 26, 2016 at 1:38 pm |

    Raise the caps. In fact end the caps. And undo the tax.

  2. This website isn’t based on REAL MEMES

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  4. Again the problem with all the debt is that the wealthy and corporation do not pay their fair share. This alone would solve at least social security & medicare and likely the national debt. Also medical care inflation would be greatly reduced by the only real sensible insurance, which is a national single pay system. The rest of the western countries do this with great success. The problem in our country is that the wealthy’s greed is considered more important than our citizens needs and protection.

  5. This is more accurate on Medicare than it is on Social Security. For your Socialk Security analysis, why would interest paid on borrowed FICA money (your #3) and reimbursements of borrowed FICA money (#4) not be counted as FICA money?

  6. Terry Henry | January 7, 2017 at 9:57 pm |

    According to social Security the FICA funds are invested in Bonds. Which means interest and premiums are paid just like it would be to any other investor. Your points 3 and 4 are misleading. The money paid by the general fund pays interest and the money the government borrowed from the trust fund. This money was earmarked for SS.

    • Yes, but the only way the government can ultimately get money to pay the bonds are from taxes. There is no real money in the trust fund, that money has already been spent. In order to collect the trust fund, the government must get that money from somewhere else. Once Social Security dips into the trust fund, it’s only sustained by taxing or borrowing more money. If they become insolvent, like Greece or Puerto Rico, where will they get the money for the trust fund? The whole thing is based on the solvency of the US government, which is now $20 trillion in debt. If their credit unravels, the fraudulent nature of the Social Security trust fund will become apparent quickly.

  7. I met the cap once in 1973 and never since, I don’t why there is a cap basically FICA penalizes low and middle class people, I would like to see the cap removed.

  8. could you explain #4 in greater detail? how did the SS “trust fund” get spent already? was it exhausted solely on SS payouts?

    • The trust fund is just US treasury bills, it’s not money sitting in a bank somewhere. In order to redeem them, the federal government must tax or borrow, just like they do with any other spending. While the trust fund originally came about because Social Security ran a surplus, this surplus didn’t extend to the entire government. So the original surplus was “spent” elsewhere in the federal budget. Now, it only exists on paper, and is only redeemable to the extent the US government stays solvent.

  9. How many $billions of dollars were borrowed in 2006 – 07 from Social Security to bail out the Banking, Savings and Loan companies who were failing due to misappropriations and felonious mortgage loans. Was any of the monies paid back and with interest?

  10. steve dunklee | March 9, 2017 at 9:34 pm |

    If wage increases for the middle class had kept up with 1/2 of inflation, there would be plenty in the trust fund to keep it solvent, instead all of the gains have gone to the CEO and above crowd who pay very little into the system.

Comments are closed.