The latest news on the solvency of Social Security and Medicare is not great. Social Security will not be able to pay out full benefits in 10 years and Medicare will face reductions even sooner.
Keep reading to get informed about the situation and find ideas for protecting your retirement financial security.
Will the Programs Really Run Out of Money? When?
First, it is important to note that neither Social Security nor Medicare will actually run out of money. However, the money being brought into the programs will soon not be enough to cover the benefits being paid out and most people refer to this as “running out of money.”
And, without Congressional action, the deficits in the program may cause benefits to be cut.
Projections Suggest Social Security Insolvency by 2033
A new report from the Social Security and Medicare Board of Trustees finds that Social Security’s surplus reserves are expected to run out in 2033.
This means that if nothing changes, the Social Security Administration has stated that in 2033, the fund’s reserves will become depleted and continuing tax income will be sufficient to pay only 77% of scheduled benefits.
So, there is risk that benefits will be reduced by 20-25%.
Medicare in Trouble in 2031
Starting in 2031, Medicare’s hospital insurance will be able to pay 89% of the scheduled benefits for hospital services, the report states.
This means that you might be paying 10% more out of pocket for some medical expenses.
So, What Will Really Happen in 2031 and 2033?
Without any further action from government, it seems that benefits will be reduced at those times. However, at a minimum, there seems to be a bi partisan mandate to protect people who are already in the program.
In other words, it is highly unlikely that anyone who is already receiving benefits will see cuts, but never say never.
If Not Cuts to Benefits, What’s the Plan for Fixing the Social Security and Medicare Problem?
Whether or not your benefits will be cut in the future is entirely dependent on who is elected to Congress and the presidency and how they choose to fix the problems.
It appears that today’s Congress has elected to side step this issue for the time being. After all, fixing the deficits will not be easy. However, there are clear options that would protect those already receiving benefits from any cuts to what they are receiving. Options include:
- Increasing taxes
- Reducing benefits for high earners
- Only reducing benefits for future recipients, not current
- Raising the age when you can start benefits for future recipients
- Increasing the number of tax payers through delayed retirement, increased immigration or increasing the birthrate (this is why some countries subsidize children). Although, this might just kick the can down the road.
- Increasing efficiencies in the Medicare program and healthcare spending
- Redirecting money from the disability fund which is in a better financial position toward the payment of Social Security
How Did We Get Here? Why Are Social Security and Medicare in Trouble?
Social Security is funded by payroll taxes. With baby boomers retiring and many people leaving the work force after the pandemic, we have less income coming into the system. At the same time, we have greater numbers of seniors receiving Social Security and these seniors are living longer than previous generations. This means that they receive benefits for a longer period of time, which obviously means a greater lifetime payout. And, the big COLA increases in 2022 and 2023 have exacerbated the problems.
If we have fewer people working, then fewer people are paying the Social Security taxes that fund the program. And, more people are drawing from the program for a longer period of time.
Similarly, Medicare also has fewer people paying in and more people getting benefits. However, there is also the fact that medical costs have risen dramatically and Medicare payouts are increasingly sizable.
NOTE: According to Andrew Biggs of the American Enterprise institute (AEI), in the 1960s there were 5 workers per retiree. We are now at only 2 workers per retired person.
But Wait, I Funded These Programs With Taxes! This is My Money!
Yes and no.
Yes, you paid into the program, but Social Security is not a retirement savings program. It’s more like a pension. The people paying in now through payroll taxes are paying for today’s retirees. When you retire, younger workers will be paying it forward for you.
And, in fact, you probably have paid less in taxes than you are going to get out in benefits. According to a 2020 report from the Urban Institute:
- A single male who retired in 2020 with a high earning history will have, on average, paid a total of $629,000 in taxes to Social Security and Medicare and is expected to get $678,000 in lifetime benefits.
- A married couple who retired in 2020 with one higher earner and one average earning history will have, on average, paid a total of $1,021,000 in taxes to Social Security and Medicare and is expected to get $1,358,000 in benefits.
See more examples by downloading their report.
Of course, the above analysis ignores the time value of money and lost opportunity cost. Social Security contributions are put into the fund over decades, not all at once. Funding Social Security this way takes the risk away from accumulating benefits, but it also hampers growth opportunities.
How to Protect Your Own Retirement
No matter what happens with Social Security and Medicare, you need a strong and well-documented retirement plan — one that you can maintain and update as your own finances evolve. Given a somewhat perilous economic situation, this is more true now than ever before.
Create a Detailed Plan: The NewRetirement Planner 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.
Maximize Your Social Security Benefits: Try different start ages and benefit amounts and review your cash flow and out of money ages.
Not Close to Retirement? Model Reduced Benefits and a Later Start Age: If you are really worried about cuts to these programs, you might want to run what if scenarios in the NewRetirement Planner where you:
- Reduce your anticipated Social Security benefit amount by 20-25%
- Assume a later Social Security start date at a 20-25% lower benefit amount
- Assume a later Medicare start date or reduced benefits by adding extra medical costs to your monthly budget
Plan for Medical Expenses: Even with full Medicare, you will have sizable out of pocket medical costs. The NewRetirement Planner helps you estimate your lifetime out of pocket costs so you can have a more reliable and secure plan.