Remember a few years back, when everyone was worried about Social Security? People were looking at the increasing costs of Medicare, the baby boom generation, and problems with the Social Security Trust Fund -- and concluding that Social Security was in big trouble. The response in Washington was to debate diverting a portion of payroll taxes into private accounts that would allow people the chance to earn better returns on their retirement money. Yet none of the proposals has gone anywhere.
So it was with great anticipation that I reviewed yesterday's release of the annual Social Security Trustees Report. After looking at its results, I'm sure you'll breathe a sigh of relief.
One more year!
The report starts out with some great news: Social Security and Medicare won't run out of money as quickly as previously expected. According to current projects, Medicare will remain solvent until 2019, while Social Security will keep chugging along until 2041. Both figures represent an extra year of solvency compared with last year's report.
Of course, you might not be satisfied with that prognosis, especially if you're 35 or younger. Luckily, the Social Security trustees are thinking about you, too. To keep the programs going for another 75 years, we can choose from two easy solutions:
- Raise payroll taxes by about 2%, from the current 12.4% for Social Security programs to 14.35%; or
- Immediately cut all benefits by about 13%.
Doesn't that make you feel better?
Medicare pains
Unfortunately, there's also some bad news: Medicare is in pretty bad shape. As a consequence of increasing medical costs, solving the shortfall in Medicare's hospital insurance will be a little more difficult than fixing Social Security. The two easy solutions:
- Hike payroll taxes by more than double, to 6.45% from 2.9%; or
- Immediately cut all spending by 51%.
Similar problems face the Medicare Part B and D programs, which rely on premiums that participants pay. Although those premiums are likely to continue rising each year, escalating costs may make it difficult for premium revenue to keep up. While those higher revenues may be good for health-care providers like HealthSouth (NYSE: HLS), Dialysis Corp. of America (Nasdaq: DCAI), and Magellan Health Services (Nasdaq: MGLN), it's bad for prospective retirees.
Don't wait and see
The best way to respond to the uncertainty about Social Security and Medicare is to take control of your retirement. Exactly what that means varies greatly from person to person. If you're already retired and collecting benefits from these programs, you're already seeing increases in Medicare premium payments and deductibles that reduce your disposable income. Depending on your financial resources, you should consider being more aggressive with your investments to make sure they keep up with those higher costs.
On the other hand, those of us who have decades to go before we even think about collecting on these benefits have a lot more flexibility. By saving more, investing well, and purchasing private products like long-term care insurance to supplement what government programs cover, we can prepare for a viable retirement even if Social Security and Medicare disappear. It's just another example of how the government definitely isn't the best person to manage your money.
As Social Security reform goes in and out of style, the one thing you can count on is your ability to respond to whatever financial situation you face. By not relying too much on resources that may not be there for you in the future, you can ensure that you'll enjoy your retirement years no matter what.
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Fool contributor Dan Caplinger isn't counting on Social Security or Medicare to be around when he retires, but he's still confident. He doesn't own shares of the companies discussed in this article. The Fool's disclosure policy is appropriate at any age.
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