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You've Got Bigger Troubles Than the Market

With the economy slowing, the stock market falling, and home prices tanking, everyone's attention is clearly focused on the here and now. But if you're counting on Social Security and Medicare to help you retire, you've got bigger problems looming -- problems that aren't likely to get solved anytime soon.

Yesterday, the government agencies that run the two most important programs for retirees released their annual Social Security and Medicare Trustees Reports. The main purpose of the reports is to provide an update on the financial health of the respective programs. By projecting current trends into the future, the agencies determine how long their respective trust funds will stay solvent.

One year closer
Unfortunately, the prognosis for current workers remains poor. Current estimates have Social Security running out of money in 2041 and Medicare using up its reserves in 2019 -- the same dates as last year.

The reports also give guidance as to what could be done to resolve the anticipated shortfalls. For Social Security, the trustees estimate that an increase in the payroll taxes that employers and employees pay from 12.4% to 14.1% would provide enough funds to keep the program running for another 75 years. On the Medicare side, it'd take a bigger increase, going from the current 2.9% tax rate to 6.44%.

Alternatively, benefits could be cut to keep the programs running. For Social Security, an immediate 11.5% reduction in benefits would be necessary; if the government waits to reduce benefits until the 2041 insolvency date, it would have to reduce benefits by 22%. Medicare benefits would need a more drastic cut, reducing benefits by more than half to keep the trust solvent.

Health care in crisis
In particular, the problems with Medicare reflect deeper issues in health care generally. While you might expect that any company with a connection to health care would be doing well, that isn't universally true. For instance, health-care insurance companies like WellPoint (NYSE: WLP  ) , Humana (NYSE: HUM  ) , and UnitedHealth Group (NYSE: UNH  ) are suffering from higher health-care costs and other costly mistakes. Even big pharmaceutical companies like Merck (NYSE: MRK  ) and Pfizer (NYSE: PFE  ) , while paying healthy dividends, have declined substantially in recent months.

Of course, short-term stock movements don't necessarily spell the end of the boom in health care. Although surgical robot-maker Intuitive Surgical's (Nasdaq: ISRG  ) shares took an almost 35% hit from their high in December, the stock has since recovered most of its losses -- and it has nearly tripled in the past year. With demographics favoring increased demand for health care in the coming years, the health-care industry has a strong tailwind that won't be going away anytime soon.

Don't expect quick action
Despite the implications that the future shortfalls in Social Security and Medicare have on your financial health when you retire, you're unlikely to see much progress this year toward resolving them. The current economic problems have everyone focused on the immediate future, especially Congressional lawmakers facing re-election this year.

Moreover, with stocks behaving badly, past proposals don't look nearly as attractive. For instance, diverting payroll taxes into private accounts looked like a great idea when stocks had risen strongly for four consecutive years. Now that markets are falling and stories are circulating about rank-and-file workers at Bear Stearns (NYSE: BSC  ) taking huge losses in their 401(k) plan accounts, no one in government will want to suggest taking on risk to finance Social Security or Medicare.

More than ever, you have to prepare for the possibility that government programs won't do as much for you as they've done for past and current retirees. By taking charge of your own retirement, you can anticipate medical costs and other living expenses, and save accordingly. Given the precarious positions that Social Security and Medicare are in, you can't afford to depend on them for a prosperous retirement.

To learn more about protecting yourself in retirement, read about


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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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