	Payroll Tax Financing of Social Security and Medicare Benefits

Payroll taxes are the main source of financing for Social Security— which includes OASI and DI—and for the HI program in Medicare— also referred to as Medicare part A. Once individuals have worked a sufficient time to qualify, they become eligible for benefits under the program. HI tax is 2.9 percent, divided evenly between the employee and the employer. How Are Benefits Determined? Neither eligibility for benefits nor the amount of benefits is based on the amount of taxes paid by an individual, and neither IRS nor the Social Security Administration (SSA) directly credits to the individual the annual and cumulative FICA taxes paid by or on behalf of each individual. The cash flows for these programs will create pressure on the federal budget long before these so-called trust fund exhaustion dates. Most EITC recipients earn credits that exceed their income tax liabilities. Efforts to Reduce EITC Noncompliance

Concerned about the level of EITC noncompliance, Congress and IRS have taken various steps to reduce it. With that authority, IRS has been able to (1) automatically disallow any EITC claim associated with an invalid SSN and (2) make appropriate adjustments to any refund that the taxpayer might be claiming. In implementing its plan, IRS has taken several actions, with some significant results. -   -   -   -   - I appreciate this opportunity to appear today to provide a basic description of the payroll taxes funding Social Security and Medicare hospital insurance and to discuss what is known about EITC noncompliance. Earned Income Credit:  IRS’ Tax Year 1994 Compliance Study and Recent Efforts to Reduce Noncompliance (GAO/GGD-98-150, July 28, 1998).
Why GAO Did This Study

This testimony discusses (1) how payroll taxes fund Social Security and the Medicare Hospital Insurance (HI) programs and (2) noncompliance associated with the Earned Income Tax Credit (EITC) and efforts to deal with that noncompliance.

What GAO Found

Payroll taxes fund the Social Security Program and the Medicare HI program. These taxes are paid in equal portions by employees and their employers. Employees and their families become eligible to collect these benefits once workers have been employed for a sufficient period of time. Although Social Security benefits are calculated using a formula that considers lifetime earnings, HI benefits are based on the health of the covered individual and are paid directly to the health care provider. Demographic trends indicate that these programs will impose an increasing burden on the federal budget and the overall economy. Regarding EITC, significant compliance problems can expose the Internal Revenue Service (IRS) to billions of dollars in overpayments. EITC noncompliance is identified as taxpayer errors and intent to defraud. IRS and Congress have taken several steps to reduce noncompliance, including the passage of laws that enabled IRS to disallow EITC claims with invalid social security numbers and the implementation of a five-year EITC compliance initiative.