ABSTRACT
This chapter discusses the financing principles and financial operations of Social Security and Medicare; the nature, purposes, and investments of the trust funds; and the current financial condition of Social Security and Medicare. It illustrates how the trust funds are invested, and explains the short-range and long-range financial condition of the Social Security and Medicare programs. The chapter explains several proposals for reducing the long-term Social Security actuarial deficit. The long-range Social Security actuarial deficit can be eliminated or reduced by increasing payroll taxes, decreasing benefits, using general revenues of the federal government, or some combination of each. A number of methods can be used to finance the Social Security program: pay-as-you go financing; full advance funding; and partial advance funding. The Social Security program is currently projected to have a long-range actuarial deficit over a 75-year projection period. The chapter concludes with a discussion of proposed solutions to the long-range Social Security actuarial deficit.
