Social Security, created in 1935, and Medicare, created in 1965, are the largest federal programs and are financed differently from most of government. They are designed as social insurance: workers pay dedicated taxes during their careers and earn benefits based on that work. Each year their trustees, including the Secretary of the Treasury and two public trustees when appointed, report on whether the money coming in will cover promised benefits.
This guide explains the taxes, the trust funds, the projected shortfalls, and the choices facing Congress.
Social Security and Medicare hospital insurance are largely pay-as-you-go: today's workers pay the taxes that fund today's retirees. That makes the ratio of workers to beneficiaries crucial. It was about five to one in 1960, is under three to one now, and is projected to fall further as the baby boom generation retires and birth rates stay low. Rising life expectancy and health costs add to the pressure.
Medicare Part A is funded mainly by a 2.9 percent payroll tax on all wages, split between workers and employers, plus an additional 0.9 percent on high earners added in 2013. Part B, covering doctor visits, and Part D, covering prescription drugs, are financed by premiums and by general revenue set by law, so they cannot run out of money but draw a growing share of the general budget. Medicare Advantage plans, Part C, are paid from the same sources.
In their June 2026 reports, the trustees projected that the retirement trust fund would be depleted in 2032, a year earlier than in 2025, the combined Social Security funds in 2034, and the Medicare hospital fund in 2033. At that point, under current law, benefits would be cut automatically to match incoming revenue, by roughly a fifth for Social Security and about a tenth for Medicare Part A. Congress has never allowed a trust fund to run out, and the 1983 reforms were enacted months before the retirement fund would have been exhausted.
Proposals to raise revenue include lifting or removing the taxable maximum, raising the payroll tax rate, taxing other income, or transferring general revenue. Proposals to slow benefit growth include raising the retirement age, changing the cost-of-living formula, or reducing benefits for higher earners. For Medicare, options include changing payments to providers and plans, raising premiums, and drug price negotiation. Supporters of tax increases argue they protect earned benefits, supporters of benefit changes argue they keep the programs affordable for younger workers, and many analysts say acting sooner allows smaller, more gradual changes.
Workers and employers each pay 6.2 percent of wages, and self-employed people pay both halves, on earnings up to the taxable maximum, which rises each year with average wages and was 176,100 dollars in 2025 and 184,500 dollars in 2026. Higher-income beneficiaries also pay income tax on part of their benefits, and some of that revenue goes back to the program. The 1983 reforms, based on the recommendations of a bipartisan commission, raised payroll taxes, began taxing benefits, and gradually raised the full retirement age to 67.
Since the 1983 reforms, Social Security collected more than it paid for decades, and the surplus was lent to the Treasury in exchange for special-issue bonds that pay interest. Those bonds are legal obligations backed by the full faith and credit of the United States, but redeeming them requires the Treasury to raise taxes, cut other spending, or borrow. Social Security began drawing down its reserves in 2021. Supporters of the trust fund system say it represents real savings by workers, while critics say the reserves are accounting entries that must be paid from the general budget.
See these programs in the full budget in where your tax dollars go, follow the borrowing that fills gaps in the national debt explained, or see how Congress writes the budget in how the federal budget works.