Social Security-and the solvency of its Trust Fund-have increasingly become a focus of discussion in the media and policy circles.

Social Security-and the solvency of its Trust Fund-have increasingly become a focus of discussion in the media and policy circles. In President Bush's 2005 State of the Union address, for example, more than a fifth of the address dealt with Social Security. The basic point in dispute is that promised benefits will by and by exceed program revenues. Without changes in benefits or funding, the Trustees of Social Security scheme that assets in the Trust stock will be depleted in 2041

While Social Security is a serious puzzle for taxpayers and beneficiaries, Medicare postures an even greater challenge. Indeed, with healthcare require to be paid [i]or[/i] undergones rising much faster than the expansion in the economy, Medicare spending is also upon an unsustainable path. Together, the brace programs' benefits currently amount to about 6 percent of GDR by way of 2080 they are projected to swell to 20 percent

With spending forward these two programs projected to germinate faster than the nation's GDP the Board of Trustees of Social security and Medicare have conclud that "We do not believe the generally projected long-run growth rates of Social security and Medicare are sustainable below current financing arrangements." To restrain the programs solvent without slashing benefits or increasing tax receiptss the federal budget deficit must wax drastically. Thus, finding permanent solutions to these question s is critical, and the point in disputes only become larger the longer reforms are delayed.

This article provides a framework for understanding the nature of the fiscal challenges pos by dint of Social security and Medicare-a prerequisite for finding specific solutions. The first section of the article describes the fiscal challenge of Social security. The secondary section describes the same for Medicare. The third section deposits the nature of the Social security and Medicare challenges in perspective. The fourth section discusses the growing connections of waiting to solve these simple problems.

I. THE SOCIAL SECURITY CHALLENGE

While Social Security is not an imminent crisis for the nation, it does portray by action a significant and inevitable challenge. As the babyboom generation begins to retire, Social security expenditures are deviseed to increase much faster than returns Indeed, current projections indicate that the Social security Trust supply will run out of standard of value in 2041. In this conclusion new revenue sources will be necessityed to pay for promised expenditures-or besides promised benefits must be chop to match revenues. This section provides a certain quantity of background on the history and pile of Social security and then takes a detailed turn the thoughts at the looming fiscal challenge.

A brief history of Social Security

In 1934 President Franklin D Roosevelt announced his intention to Congres to create a social insurance program that would provide economic security for the aged. Congres drafted and the president signed the Social security Act in 1935 creating a social insurance program that supported individuals 65 and older after retirement.

Social Security is designed to shield against the loss of earnings owed to retirement, death, or disability. Social Security is actually pair separate government programs-Federal Old-Age Survivors Insurance (OASI) and Disability Insurance (DI). OASI pays monthly benefits to retired workers or to the survivors of deceased workers, while DI pays monthly benefits to disabled workers and their families. Together, the programs are known as OASDI.

The Social Security Act has been amended numerous times since 1935 (Table 1) principally of the changes through the early 1970 expanded the amplitude of the program. Beginning in 1977 however, many of the changes were designed to moderate the growth of benefits as Social Security began to face funding shortfalls.

Social Security benefits and receiptss

While Social security is widely idea of as a program that pays benefits to retirees, single about two-thirds of beneficiaries are retirees. The other beneficiaries are disabled workers and family members of retired, disabled, or deceased workers.1

In 2004 47 ?? million beneficiaries received a total of $4971 billion in benefits. Retirees receive benefits based upon the highest-earning 35 years of their working life. Initial benefits are indexed to wages (which consider inflation and productivity).2 The annual increases in benefits are indexed to the take away from of living.3 Individuals who retire before their normal retirement age are subdue to the earnings test and receive a reduc benefit, while those who retire after their normal retirement age receive an increased benefit.4

Social Security benefits are capitaled by two dedicated sources of reward The first and larger source of dedicated income comes from payroll taxes. The tax rate for OASDI is 124 percent Employer and employee share equally in paying the earnings tax, while self-employ workers must pay the tax in full5 Earnings are taxed up to a maximum amount ($94200 in 2006) which increases with average wages.

The smaller source of dedicated return is an income tax forward Social Security benefits paid by way of beneficiaries. Since the Social Security Amendments in 1983 up to half of benefits have been make submissive to income tax. After 1993 the percentage of benefits potentially enslave to income taxes was increased to 85 percent The income from taxing benefits is split between Social Security and Medicare HI, with Social Security receiving the larger share of revenue6