Surprising Facts About Payroll Taxes and Medicare

Posted on Jul 12, 2012

According to an opinion piece in the Christian Science Monitor, most Americans don’t have a firm grasp of how their payroll taxes help to fund Social Security and Medicare. Most people tend to think that, since a portion of their taxes goes to each program, they must be funded in roughly the same way. An analysis of data released by the Congressional Budget Office shows that payroll taxes across the U.S. only fund about a third of Medicare’s annual costs, while the remainder comes from premiums, earmarks and general revenues. By contrast, as recently as 2010, 93 percent of Social Security’s costs were covered by payroll taxes. The difference is due to the fact that, unlike Social Security, which is a single program, Medicare is divided into parts, and payroll taxes only cover one of them (part A, which provides hospital insurance). Unfortunately, this distinction often gets lost in the political debates about taxes and government entitlement programs.

Why is this important? Well, if you’re an employer or employee, you are probably worried about how changes to Social Security and Medicare will affect your taxes, or the taxes you need to collect from your employees. So far, increases in Medicare spending have been mostly covered by adjustments to how much is paid for by premiums and how much is paid for by general revenues, rather than by increases in payroll taxes. The CBO projects that in the coming years, more of the costs of Medicare will start to be covered by premiums paid by beneficiaries, and the share covered by general revenues will slightly decline.

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