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The History of Medicare Payroll Deductions

Medicare is a program of health insurance for persons who are retired or disabled. Part of the funding for Medicare comes from premiums paid by participants, just like private health insurance. However, Medicare is subsidized by payroll deductions that offset much of the cost, keeping premiums affordable. The payroll deductions from employees' paychecks are matched by equal employer contributions.

  1. Origins

    • Congress passed Medicare in 1965. Officially, the program is authorized by Title 18 of the Social Security Act as Health Insurance for the Aged and Disabled. The purpose of Medicare is to enable persons who can no longer work to have access to health insurance and thus to adequate health care. The first Medicare payroll deductions were implemented in 1966. Originally, the Medicare tax rate was 0.35 percent of all earned income, with employee contributions matched dollar for dollar by employers.

    Early Rates

    • In the 1960s, the number of retirees and the cost of health care rose rapidly. Congress raised the Medicare payroll tax to 0.5 percent in 1967 and to 0.6 percent in 1968 to keep up with increasing costs. In 1973, Medicare payroll deductions rose to 1.0 percent of total earnings. The rate dropped to 0.9 percent in 1974. Medicare tax was raised again to 1.0 percent in 1978. Congress once more increased payroll deductions in 1979, this time to 1.05 percent.

    Changes in the 1980s

    • The Medicare payroll tax reached 1.3 percent in 1981. Another change was introduced in 1984. From 1966 through 1983, self-employed persons paid the same rate as employees, but with no matching employer contribution. In 1984, self-employed individuals began to pay twice the Medicare payroll deduction rate as employed persons, thereby making up for the missing employer contribution. Congress raised the Medicare payroll tax to 1.35 percent in 1985 and to 1.45 percent in 1986.

    2011 Rates

    • After 1986, Congress made no more changes in Medicare payroll deductions. As of 2011, the tax rate remained at 1.45 percent of earned income. For self-employed persons, the tax stayed at 2.9 percent. In late 2010, Congress lowered the Social Security tax rate for employees from 6.2 percent to 4.2 percent. However, employer contributions and the Medicare payroll tax remained unchanged.

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