Americans earned nearly $7.3 trillion in wage income in the most recent tax year for which data has been finalized, according to the IRS, and they paid Medicare tax on every penny of it. Here's what that translates to for the average American and what could happen to Medicare taxes in the future, given the program's delicate financial condition.
The Medicare tax rate in 2017
Of the three wage-based types of tax American workers pay, Medicare is perhaps the most straightforward and easy to calculate. Federal and state income taxes are based on a set of marginal tax brackets, and Social Security tax is only assessed on income below a certain threshold that changes annually.
On the other hand, the Medicare tax rate of 1.45% is assessed on all wage income. Employers pay an equal amount, for a total rate of 2.9%.
And although it doesn't affect the average American worker, in the interest of being complete, there's an additional Medicare tax that high earners are required to pay. Since 2013, high-income taxpayers have been assessed an additional 0.9% Medicare tax on earned income above certain thresholds -- currently $200,000 for single taxpayers and $250,000 for married taxpayers filing jointly.
How much Medicare tax does the average American worker pay?
So, let's see how much the average American pays in Medicare taxes. According to the Bureau of Labor Statistics, there were about 137.9 million American workers in mid-2015, if you include part-time employees. Also in 2015, the most recent year for which complete taxation data is available, $241.1 billion was paid in Medicare payroll taxes.
Of this amount, $211.9 billion came from wage income. The remaining $30 billion or so came from other sources that don't impact the average American, such as the 0.9% additional Medicare tax I mentioned earlier.
By dividing the total Medicare tax that came from wage income by the number of workers, we find that the average American worker's contribution to the Medicare Hospital Insurance (HI) program was about $1,537. However, keep in mind that half of this amount was paid by the employer, so the average Medicare tax that was paid in 2015 per worker was about $769. This corresponds to an average annual wage of $53,000, which is consistent with data from the Census Bureau and other sources.
Will Medicare taxes go up in the future?
For the time being, Medicare taxes are a relatively small piece of the average American's tax bill. In another recent article, my colleague Brian Feroldi determined that the average American pays a wage-based tax rate of nearly 32% between income (federal and state), Social Security, and Medicare taxes. In other words, the 1.45% Medicare tax rate translates to less than 5% of the average worker's taxes.
However, there's a strong possibility that the Medicare tax rate will be increased in the not-too-distant future. It's no secret that Medicare isn't in the best financial shape, and at the current rate, the program will be out of money in 2028. Here's a more thorough discussion of the state of Medicare's finances and what we can do about the problem, but to sum it up, too many people will be collecting benefits and not enough taxpayers will be funding those benefits.
According to the Medicare Trustees Report, the 75-year deficit is projected to be equivalent to 0.73% of taxable payroll. This means that by raising the current 2.9% Medicare tax rate to 3.63% (1.815% for employees), the program would maintain its solvency for at least another 75 years. This would raise the average American's Medicare tax bill from $769 to about $962, in 2015 dollars.
Finally, it's worth pointing out that a tax increase isn't the only way to fix Medicare. There are other options on the table, including raising the eligibility age or privatization of the program. However, a tax increase would be one way to take care of the problem, and most Americans say that they are fine with higher payroll taxes if they don't have to worry about their future Social Security and Medicare benefits.