Social Security and Medicare are in real financial trouble. If you are of retirement age now, your benefits are probably not in peril. However, nothing is certain and if you dive into the numbers, you can see that there are very real concerns about the future of these programs.
Big Problems for Social Security Become Real
A new report finds that Social Security is now paying out more in benefits than it collects in taxes. It is officially running in the red. As a result, for the first time since 1982, the administration needs to tap into its pool of reserves to fund payouts.
And this is only the beginning of the program being in dire straights. There are currently 62 million people in the Social Security system. That number will jump to 90 million by 2040 at which time there will be fewer workers paying into the system relative to each person claiming which will further exacerbate the program’s deficit. (Per a recent post in HumbleDollar in 2010 there were 4.6 workers aged 20-64 vs people over 65, in 2020 that ratio expected to his 3.5 and 2.7 in 2030.)
Social Security’s two trust funds, designed as backups, are slated to be out of money by 2034 at which time the program will only be able to pay about three-quarters of retiree’s benefits.
And this depressing information may be understated. Laurence Kotlikoff, a professor of economics at Boston University, is extremely concerned about the validity of this recent report from Social Security. He actually thinks that the severity of the situation is far more dire. He told Marketplace:
“… we’re in a far worse shape than the news reports are stating. The beginning of the document is advertising that the trustees are not doing their work. They’re hiding in this document, way in the appendix, the truth about that the system is in far worse shape than they were talking about at the beginning of their document. The trustees are saying that in 2034, the trust fund will run out of money. And at that point, we need a 21 percent immediate cut, and permanent cut, in all the benefits being paid by Social Security, including disability benefits. But if you look at that table VI.F1, it’s saying something very different. It’s saying we need a 24 percent cut not starting in 2034, but starting today.”
Medicare in Even More Trouble
The report from Medicare’s trustee’s offers an even bleaker picture for that program.
The trustees say that Medicare’s hospital insurance fund (funded mainly through payroll taxes) will be depleted in 2026 (eight years from now) — three years earlier than was projected last year.
Without changes, the trustees say that the share of benefits that can be paid from revenues will decline to 78% in 2039 and then rise again to 85% in 2092.
How Did We Get Here?
The reasons for the problems for Social Security are slightly different than those for Medicare.
Social Security: The problems for Social Security are related to the huge numbers of baby boomers who are retiring and our increasing lifespans. There are greater numbers of people collecting Social Security benefits than before. Furthermore, there are declining numbers of people working and paying into the system.
Medicare: The same problems exist for Medicare as Social Security: less people paying in and more people getting benefits. However, there is also the fact that medical costs have risen dramatically and Medicare payouts are sizable.
In fact, according to a 2015 report by the Urban Institute, an average couple who turned 65 in 2015 will receive $422,000 in Medicare benefits even though they only paid $140,000 in taxes toward the program. (A couple turning 65 in 2030 will likely receive $621,000 in benefits even though they have only paid $179,000 in taxes.)
How to Fix the Problem? What Needs to Happen?
Whether or not your benefits will be cut in the future is entirely dependent on who is elected to office and how they choose to fix the problems.
Fixing the deficits will not be easy. A few of the more obvious solutions include:
- Increasing taxes
- Cutting benefits for everyone
- Reducing benefits for high earners
- Only reducing benefits for future recipients, not current
- Raising the age when you can start benefits
- Increasing the number of tax payers through delayed retirement, increased immigration or increasing the birthrate (this is why some countries subsidize children)
AARP has a detailed discussion of these and other proposals.
How to Protect Your Own Retirement
No matter what happens with Social Security, you need a strong and well documented retirement plan — one that you can maintain and update as your own finances evolve.
It is also a good idea to run various scenarios with your numbers. You might want to see what would happen if your benefits were reduced and have a plan for that possibility.
The NewRetirement retirement planning calculator is an extremely detailed tool that can help you set goals for retirement, find possibilities for achieving those goals and keep track of your progress. Get started today.
How much are you planning to receive from Social Security and how does it impact your overall retirement plan?
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