Running Head: Retiring America 1

Retiring America: 

The Economic Consequences of Social Security and Medicare 

Casey Hargett 

Sinclair Community College

 
Retiring America 2

Retirement in the United States: 

The Economic Consequences of Social Security and Medicare 

Social Security and Medicare, two of the largest government-funded programs, help

Americans who are retiring and Americans who are on disability by offering a stable monthly

income and health insurance. Even though these two government-run programs are providing

stable monthly benefits to beneficiaries, both programs are hurting the economy rather than

helping it.

Social Security was first established by Franklin Delano Roosevelt under the Social

Security Act of 1935 to combat the Great Depression, which crippled the United States. Then

Medicare was later added to the Social Security Act in 1965 by Lyndon B. Johnson to offer

government-run health insurance to Americans.

At that time of its ratification, Social Security was the largest social insurance agency in

the United States (Peterman & Sommer, 2015, p. 3). Social Security was an agency first

established to offer payments to those 65 and older but was amended to include those with

disabilities. When FDR first created the act, it was to “’give some measure of protection to the

average citizen…against poverty-ridden old age’” (USDT, 2007, p. 2). 

 Even though the act was first established to include only those 65 and older, it later

offered more benefits to working families, disabled workers, and to the families of deceased

workers. By 1957, Social Security had expanded to include disability insurance (USDT, 2007, p.

2).  In 2019, Social Security grew to cover 178 million workers and supply monthly cash benefits

to 64 million cohorts (Huston, 2020, p. 1). 

Medicare was established by Lyndon B. Johnson under Title XVIII to provide those

eligible with government-run health insurance (Davis, 2021, p. 1). Medicare is comprised of

different parts; the parts are listed as A through D. Part A is the most notable; this includes
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coverage for health insurance, hospice, nursing facilities, and home health visits. Part A also

includes Medicaid, which is similar to Medicare except it is run by state governments, not the

national government, and is based on the individual’s income. Most Americans are eligible for

Medicare Part A benefits because they are 65 years or older. However, Parts B through D are

voluntary, meaning that those eligible pay extra for Part B through D benefits. Part B offers

different medical services, outpatient services, and durable medical equipment. Part C offers

“private plan options” that many Part A and Part B beneficiaries are included in. Lastly, Part D

program gives beneficiaries “optional outpatient prescription drug coverage” (Davis, 2021, p. 1).

Most eligible for Medicare have both Part A and Part B plans.  

Social Security and Medicare are on a pay-as-you-go system; basically, the taxes that

Americans pay into Social Security and Medicare get put in a tax “bucket” to be dispersed across

the two programs. Most Americans who are currently employed pay payroll tax, which each

employee must pay out of their gross pay (earnings before taxes) (USDT, 2007, p. 3) (Davis,

2021, p. 2) 

 Payroll tax also covers, state and federal unemployment, state and federal corporate tax,

401k (for-profit retirement plan) or 401B (non-profit retirement plan), and FICA taxes. Federal

Insurance Contributions Act (FICA) taxes were established in 1935 and began being collected in

1937 to fund Social Security and eventually, Medicare. Each employee contributes 6.2% of their

gross pay into Social Security and contributes 1.45% of their gross pay into Medicare. In

addition, for each employee, employers must also contribute 6.2% into Social Security and

1.45% into Medicare. The Total contributed for each employee is 15.3%, which is the combined

totals of Social Security and Medicare that both the employee and the employer contribute. 

 For Social Security, the 12.4% is then distributed to the Old Age and Survivors

Insurance (OASI) trust fund and the Disability Insurance (DI) trust fund; together they form the

OASDI trust fund (USDT, 2007, p. 3). For Medicare, the 2.9% contribution is regulated
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primarily through the HI trust fund (Health Insurance). Davis, author for Congressional

Research Service,  

The HI trust fund is a financial account in the U.S. Treasury into which all income to the

Part A portion of the Medicare program is credited and from which all benefits and

associated administrative costs of the Part A program are paid (Davis, 2021, p. 2). 

Even with FICA taxes importing revenue into the two programs, the two programs are expected

to become insolvent in the coming decade(s). These predictions are putting pressure on the U.S

Treasury Department and the federal government to figure out how to fix the problem. In 2019,

Social Security and Medicare took up most of the mandatory federal budget, which is up 25%

from 1962 (Phaup, 2019, p. 25).  

While in theory the two programs excel in helping poverty-stricken, retired, and disabled

Americans, Social Security and Medicare have added more burdens on Americans by increasing

taxes, by discouraging people from investing in alternate retirement plan options and reducing

benefits for working Americans and possibly becoming insolvent in the future, which would be

in conflict with Federal law.  

Possible solutions to the problems facing both programs are either an increase in taxes

(Social Security and Medicare) or reducing current benefits (USDT, 2007, p.2). An increase in

Social Security and Medicare tax would destroy the American work force. Already with the

current COVID-19 pandemic, many are hesitant to return to work; now add more taxes upon the

American work force.

However, even though the American work force would be crippled with higher Social

Security and Medicare taxes, most employers are now paying employees a higher wage to

increase the job retention rate. The job retention rate measures the average number of workers

who leave the work force. With the pandemic, corporations/businesses have been increasing their

wages voluntarily to help promote the employees to remain with the company. The increase of
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wages is called the “efficiency wage rate,” which is an economics term that explains that it

increases the wages to encourage workers to work for that company and to keep the workers

within the company. So, with an increase in payroll for many workers, a Social Security and

Medicare tax increase would not have a crippling effect on the economy.

Another solution is to reduce current benefits. Reducing benefits would directly conflict

with federal law. As stated before, the SSA is enforced legally to pay full benefits to all

beneficiaries under the Social Security Act (Huston & Morton, 2019, para. 1). In addition, the

USDT explains, “Delaying changes to Social Security reduces the number of cohorts over which

the burden of reform can be spread. Not taking action is thus unfair to future generations. This is

a significant cost of delay” (2007, p. 2). This is unfair to future generations because the solution

is to either decrease benefits on those enrolled in Social Security in the future or to increase taxes

on the upcoming working Americans. There are multiple problems with the two programs, and

there are solutions that are desirable to many Americans that could ultimately change retirement

for Americans. While politically, the decrease in benefits to those eligible would decrease the

possibility of being reelected for another term.

But Americans do not solely have to rely on Social Security and Medicare for retirement.

Americans can invest in a 401K or 401B plan, for which most employers match their

contributions into the two plans. Americans can also Invest in a Roth IRA plan; unlike a

Traditional IRA plan, a Roth IRA plan is taxed when you invest into the fund so you will receive

“tax free money” upon your retirement (Doerrer & Trotta, 2020, para. 2) Or invest in the stock

market. Investing into the stock market can increase the economy of the United States and can

increase Americans’ wealth. But the downside with the stock market is if the stock market faces

a downward slope, Americans could possibly lose their wealth close to retirement.  

But these alternative methods of preparing for retirement is confusing to some

Americans. For instance, most Americans invest in the stock market through a bank. These
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banks then gather stocks into a mutual fund, which is the combination of stocks that form your

investment. Moreover, the stock market is active. An individual who is invested in companies

that are traded on the New York Stock Exchange or the National Association of Securities

Dealers Automated Quotations, which is the electronic version of the New York Stock

Exchange, follow economic news from 9:30 AM EST (when both the NYSE and NASDAQ

open) to 4:00 PM (when both the NYSE and NASDAQ close). So, for those who are close to

retirement this could be overwhelming and confusing. In addition, those who are close to

retirement could possibly loose part of their retirement because the stock market is volatile.

Even with the projected insolvency of both agencies, Social Security and Medicare offer

many benefits to those eligible. Currently, roughly 61 million Americans receive monthly

payments through the Social Security system; 44.9 million are retired workers and their families,

6.01 million are survivors of deceased workers, and 10.51 million are disabled workers and their

families (Nasi.org). Nasi.org explained: 

In 2016, Social Security paid $911 billion in benefits to retired workers, disabled persons,

and dependents of retired, disabled or deceased workers. Of the total benefit payments,

71 percent was paid to retirees and their families, 13 percent to survivors of deceased

workers, and 16 percent to disabled workers and their families. (Para. 3) 

With the current projections of retirees rising, more benefits were paid out to those eligible in

2020. With the COVID-19 pandemic, Social Security has provided many Americans a stable

source of income, giving the beneficiaries income to buy essential items.  

Medicare, which is also gaining enrollment, still grants those qualified with a stable,

government-run health care system. The current COVID-19 pandemic has offered many

enrollees health care benefits. These benefits, mainly comprised of Part A and B benefits because

the two programs cover health care services (Davis, 2021, p.1), allow them to go to the hospital

when needed and, through the Part D program, gives them tax breaks on prescription drugs.
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Medicare’s beneficiaries are mainly comprised of retired workers, most of whom are eligible for

Medicare due to age. Medicare is also comprised of those with disabilities, who make up about

7.3 million people (AARP, 2009, p. 1). AARP also is expecting Medicare enrollees to rise,

“Currently, 44 million beneficiaries—some 15 percent of the U.S population—are enrolled in the

Medicare program. Enrollment is expected to rise to 79 million by 2030” (AARP, 2009, p. 1).  

The government is unable to predict exactly when the insolvency date is. In 2007, the

Social Security Administration said that “the Social Security Administration projects that the

OASDI trust fund (the combined OASI and DI trust funds) will have insufficient funds to pay

currently scheduled

benefits beginning

in 2041” (USDT,

2007, p. 7). While in

2019, Huston and

Morton predicted

that the OASDI

trust fund will be

insolvent by 2034

(2019, para. 1). However, according to the 2021 Annual Reports, Huston shows that in Table 1

(above) the OASDI Fund’s will be insolvent by 2034, while the 2020 projections stated that the

projected insolvency was 2035. Moreover, both the 2020 and 2021 reports present that in both

years the OASDI’s cost exceeded total revenue earned (insolvency) (Huston, 1). According to

Note. From “Social Security: Selected Findings of the 2021 Annual Report,” the trends, the
by Barry F. Huston, 2021, p. 1 (https://eds-s-ebscohost-
com.sinclair.ohionet.org/eds/pdfviewer/pdfviewer?vid=29&sid=d0e02d59- reasons the
966f-4209-84db-3cfd8f0096a8%40redis)
programs are

facing the insolvency: one, not receiving enough funding through FICA taxes, and two, the funds
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are gaining beneficiaries, causing an increase in payments and benefits, but a decrease in

revenue. The two programs need to be corrected sooner rather than later.  

As predicted in 2019, if no laws or mandates are enacted, the trustees of Social Security

predict the DI fund will be insolvent by 2052. Moreover, the OASI fund will be “depleted in

2034” (Huston & Morton, 2019, para. 1). Huston and Morton then explain that both trust funds

are, “considered in combination”, which means combined both trust funds could be depleted by

2035 (2019, para. 1). That being said, insolvency dates fluctuate from year to year. This is

mainly due to increases in retirees and those on disabilities. For example, in 2007 the insolvency

date was 2041. 

 Medicare, on the other hand, is expected to become insolvent by 2026, which is the same

prediction made in previous years (Davis, 2021, p. 1). Similar to Social Security, though, the

insolvency date, namely of the HI trust fund, has fluctuated since its ratification (Davis, 2021,

Tbl. 1). Although these predictions do not reflect how the COVID-19 pandemic influenced

Medicare, the agency is predicting a disastrous impact. As of 2020, the HI insolvency date is

2026, but it is expected to change with the COVID-19 pandemic. This is due to fewer people

working, which is decreasing the funding of Medicare, and the increase in beneficiaries using

Part A benefits. Davis of the Congressional Research Service, explains that it is projected that

there will be more benefits paid starting in 2021, which the income received will be far less than

the benefits paid (Davis, 2021, Tbl. A-1). 

Insolvency is becoming more likely for Medicare due to more Americans retiring. The

reason more Americans are retiring is because of the baby-boom in the 1950s. The baby-boomer

generation is causing more outflow of payments than the inflow of income into the Medicare

system, which causes the funding the agency (Medicare tax 1.45%) to become negative. Even

though Medicare is receiving more payroll taxes and other forms of income, more benefits are

being paid as the years progress (Davis, 2021, Tbl. A-1). 

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As stated earlier, both Social Security and Medicare are facing the possibility of

economic insolvency. As of 2019, the date of insolvency of the OASDI trust fund is 2035

(Huston & Morton, 2019, para. 1). These two funds make up the bulk of the Social Security

program. If the 2019 trend is correct, the government-run program would only be able to pay for

roughly 80% of scheduled benefits by 2035 (Huston & Morton, 2019, para. 1).  

If the trend continues and Social Security becomes insolvent, the program will conflict

with federal laws. Huston and Morton go into more detail explaining: 

If a trust fund became depleted and current receipts were insufficient to cover current

expenditures, there would be a conflict between two federal laws. Under the Social

Security Act, beneficiaries would still be legally entitled to their full scheduled benefits.

However, the Antideficiency Act prohibits government spending in excess of available

funds, so the Social Security Administration (SSA) would not have legal authority to pay

full Social Security benefits on time. (Huston & Morton, 2019, para. 2) 

The Antideficiency Act, also known as ADA, was enacted in 1982 so that the government could

not spend funds that are not available. In addition, the Social Security Act must pay all benefits

on time. It is not only the Social Security Administration’s (SSA) duty to pay all beneficiaries

full benefits on schedule, but also not to spend more revenue than readily available. So, if the

SSA could not fulfill its obligation under the Social Security Act, the administration could face

legality issues involving their program.  

Medicare is also facing the possibility of becoming insolvent. In 2021, the insolvency

date for the HI trust fund was 2026 (Davis, 2021, Tbl. 1). In 1997, the U.S Congress tried to fix

the problem by issuing the Balanced Budget Act of 1997 (BBA 97). Davis explains that

“Medicare spending intensified as Congress considered legislation to bring the entire federal

budget into balance and culminated in the passage of the Balanced Budget Act of 1997 (BBA 97;

P.L. 105-33)” (2020, pg. 3) This extended the insolvency date and made the Medicare budget be
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balanced. Now, the rise of retirees and other eligible for Medicare insolvency is becoming closer

to present day. 

In conclusion, Social Security and Medicare are the largest government-funded programs

currently within the United States. When Social Security was first established by Franklin

Delano Roosevelt under the Social Security Act of 1935, the act gave stable income to those 65

or older. Now, it offers stable income to a variety of Americans. In 1965, Medicare was added to

the Social Security Act by Lyndon B. Johnson. Medicare has now grown to offer health benefits

to Americans. While both programs give aid to Americans, Social Security and Medicare

ultimately hurt working Americans by increasing taxes, increasing federal debt, and having the

possibility of becoming insolvent in the future.  

References

Davis, P. A. (2021). Medicare: Insolvency Projections. Congressional Research Service: Report,

1–14.
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Doerrer, J. H., & Trotta, S. (2020). Developing a solid approach to advising clients on Roth

IRAs. Tax Adviser, 1–5.

Huston, B. F. (2021). Social Security: Selected Findings of the 2021 Annual

Report. Congressional Research Service: Report, 1.

Huston, B. F., & Morton, W. R. (2019). Social Security: What Would Happen If the Trust Funds

Ran Out? Congressional Research Service: Report, 1–19.

Peterman, W. B., & Sommer, K. (2019). A historical welfare analysis of Social Security: Whom

did the program benefit? Quantitative Economics, 10(4), 1357–1399.

https://doi.org/10.3982/QE657

Phaup, M. (2019). Budgeting for Mandatory Spending: Prologue to Reform. Public Budgeting &

Finance, 39(1), 24–44. https://doi.org/10.1111/pbaf.12210

Umans, B., & Nonnemaker, L. K. (2009). The Medicare beneficiary population. AARP. https://

assets.aarp.org/rgcenter/health/fs149_medicare.pdf

Social security reform [electronic resource]: the nature of the problem. (2007). [Washington,

D.C.]: U.S. Dept. of the Treasury, 2007.

What is Medicare? medicareresources.org. (2022, February 7). https://www.medicarere-

sources.org/basic-medicare-information/what-is-medicare