Understanding Social Security and Medicare

The Social Security fund and the Medicare fund are set up in similar ways: taxes are collected from employers and employees and used to pay current benefits. Medicare is somewhat more complex in that recipients pay premiums to help pay for benefits. For most of the life of the funds, tax receipts have exceeded benefits paid, and the excess moneys went into trust funds, which bought (invested in) special US Treasury bonds. These bonds are non-negotiable; that is, they can only be redeemed by the US government. The trust funds are to be a backup in years when taxes collected are less than benefits paid.

To redeem the bonds, the federal government might use general receipts from taxes, issue ordinary US bonds (borrow more money), or print money causing hyper-inflation.

In 2010, Social Security benefits paid exceeded Social Security taxes collected, and the trust fund was required to make up the difference. Current official projections indicate that the trust fund will be used up by 2036, and benefits will have to be sharply reduced.

In 2011 Medicare benefits paid exceeded Medicare taxes collected, and the trust fund was required to make up the difference. Current official projections indicate that the trust fund will be used up by 2024, and benefits will have to be sharply reduced.

The combined deficit, on a monthly basis, is now running about $20 billion a month, and it is feared by many economists that the current economic stagnation, combined with increasing retirements, will actually use up both funds within 10 years.

To do your own research, a good place to start is
“Status of the Social Security and Medicare Programs”