Medicare funding, what your FICA taxes pay and what they don’t.

Government, Medicare, Observations on life, Politics 2 comments

The Medicare payroll taxes (the 1.45% deducted from your paychecks and matched by your employer) go directly into the Hospital Insurance (HI) Trust Fund, which exclusively funds Medicare Part A.

Paying this tax throughout your career is what allows you to qualify for premium-free Part A (which covers inpatient hospital stays, skilled nursing facilities, and hospice care) once you reach age 65, provided you or your spouse hit the magic number of 40 work credits (roughly 10 years of work). This fund may be depleted as soon as 2036.

Major source of fraud in Medicare

However, the way the rest of Medicare is funded is a completely different story.

How the Other Parts of Medicare Are Funded

Because your payroll taxes only pay for Part A, the other branches of Medicare have to rely on a mix of general federal tax revenues and monthly premiums paid by beneficiaries.

  • Medicare Part B (Medical Insurance): Part B covers doctor visits, outpatient care, and preventative services. It is funded primarily by the Supplementary Medical Insurance (SMI) Trust Fund. About 25% of this fund comes from the monthly premiums beneficiaries pay (the standard premium is $202.90 per month), while the remaining 75% is heavily subsidized by general federal income tax revenues.
  • Medicare Part D (Prescription Drug Coverage): Like Part B, Part D is financed through the SMI Trust Fund. It is paid for using a combination of monthly premiums from beneficiaries, general federal revenue, and state contributions.
  • Medicare Part C (Medicare Advantage): These are private plans that combine Parts A, B, and sometimes D. They don’t have a separate pool of funding; instead, the federal government pays the private insurance companies a fixed monthly amount per enrollee using money pulled from both the Part A and Part B trust funds.

The Exceptions to the Rule

While standard payroll deductions strictly target Part A, there are a couple of high-earner surtaxes created by the Affordable Care Act that complicate things slightly: The 0.9% Additional Medicare Tax: This applies to earned income over $200,000 for single filers ($250,000 for joint filers). While it is technically a payroll tax, the revenue goes into the general pool to help shore up the Medicare system as a whole.

  • The 3.8% Net Investment Income Tax (NIIT): This is an unearned income tax on investment revenue (like capital gains, dividends, and interest) for higher income brackets. Though often referred to as a “Medicare surtax,” this money goes straight into the federal government’s general fund rather than the hospital trust fund.

    • 2 comments

    1. There is no need to affect the deficit with a form of Medicare for all, just set the taxes, premiums and out of pocket costs to cover costs. My wife and I pay IRMAA premiums and over $300 a month each for Medigap. I paid $98,080 in Medicare payroll taxes. It all adds up to a lot of tax money and premiums. However, her treatments since last October are running $14,000 to $20,000 a week. Our out of pocket costs are limited to the Part B deductible. We are surely using other people money and way more than I mentioned. That’s why it insurance. Believe me, I’d rather pay those taxes and premiums and never collect a penny. More average retirees paid a lot less in taxes and premiums and yet receive the same benefits as we do. That does not bother me at all.

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    2. Hard to believe but Medicare benefits, relative to funding, are even more progressive than Social Securit.

      I once calculated what the FICA-Med taxes an individual reaching age 65 in 2021 needed to have paid to qualify for non-contributory, dual eligible, 100% coverage – 40 quarters of FICA-Med contributions of $723.84 during ten years in the 1970’s (plus an additional, equal amount from the employer)! Keep in mind that the estimated monthly premium for Part A coverage in 2021 was $471, so, the cost of Medicare Part A coverage alone could exceed the worker’s FICA-Med contributions in as little as 2 months (actually one month if there is a spouse the same age who did not work for wages).

      Because that same individual would likely have low income in retirement, they would also receive dual eligibility (Medicare and Medicaid) which would waive their Part B and Part D contributions, AND, reduce or eliminate their deductibles, copayments and coinsurance.

      100% coverage from age 65 through death for < $1,500 in taxes.

      This is likely to become more prevalent when we end up with Medicare For All – a la Bernie, Liz, AOC, Mamdani, etc.

      And, who will pay? Well, when you run ~$2 Trillion a year in annual federal deficits, it will be paid by tomorrow’s citizens – Americans too young to vote and generations unborn.

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