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The Biggest Threat Your Retirement Has Ever Faced

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Amid all the recent bad news plaguing our economy, your retirement faces no shortage of threats. The last straw may have come last week, when the government released reports about the failing prospects for Social Security and Medicare -- a failure that could fundamentally change the way you have to survive in retirement.

Consider some of these sobering facts:

Given those concerns, we'd all rather not hear about the looming problems now facing traditional retirement backstops Social Security and Medicare. Unfortunately, these troubles won't get solved overnight.

Worse than expected
Every year, the trustees of Social Security and Medicare programs release an annual status report. This year's reports brought the worst news we've seen in a while.

According to actuarial projections, the trustees now believe that Social Security will run out of money in 2037, four years earlier than projected last year. For Medicare, the situation is even more dire. By 2017, the program's reserves will run out, two years earlier than the estimate in last year's report.

Many of the programs' problems stem from our current economic troubles. With skyrocketing unemployment, those who no longer earn wages also stop paying payroll taxes into the Social Security and Medicare systems. The result is lower-than-expected revenue for those programs, which helps bring insolvency dates closer to the present.

What can be done?
Both reports offer some bitter medicine to fix their problems. If Social Security taxes -- currently split evenly between employers and employees -- were increased from 12.40% to 14.41% now, the trustees project that the programs could survive on those funds for another 75 years. Alternatively, if benefits were cut right now by 13.3%, the program could also survive.

Medicare's woes are considerably worse. Payroll taxes would have to rise from 2.90% all the way to 6.78%, or benefits would need to be cut by 53%.

The reports also give some other scenarios, such as waiting until the programs run out of reserves before making tax increases or benefit cuts. As you'd expect, the longer we wait, the more extreme measures we'll need to take to ensure recovery.

Big changes in health care?
Of course, the challenges of health care have been all over the news lately. Under the general plan suggested by the Obama administration, health insurers like UnitedHealth (NYSE: UNH  ) and Humana (NYSE: HUM  ) could be forced into a competitive bidding process for Medicare supplement policies, which could potentially cut their profits.

Similarly, opening our borders to imports of foreign drugs could eat into margins at big pharmaceutical companies, such as Merck (NYSE: MRK  ) and Pfizer (NYSE: PFE  ) , and cut incentives for younger research companies such as Dendreon (Nasdaq: DNDN  ) to go through the expensive and risky process of developing new drugs.

Nevertheless, the health-care sector still has a few aces up its sleeve for investors. The number of aging baby boomers entering retirement will increase the stress on Medicare, but it'll also heighten demand for medical services. Whatever happens with health-care administration, medical-device makers such as Medtronic (NYSE: MDT  ) and Intuitive Surgical (Nasdaq: ISRG  ) could still benefit.

Plan for any contingency
Even though Social Security and Medicare are vitally important for most people, huge budget deficits and our current economic woes will make it extremely difficult to get these programs back on course financially. No one seems to want to raise taxes during a recession, but the proposals on health-care reform are all expensive.

The conclusion you have to draw is that government programs may not do as much for you as you'd hoped. 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, the fruits of your pre-planning might be all you have after you retire.

More on smarter ways to retire:

Want to make Social Security and Medicare part of a winning plan for retiring well? Check out our Rule Your Retirement service, where Foolish analyst Robert Brokamp and his team of experts run the numbers to figure out your best retirement strategy. Get full access to the current issue and our complete archives with a free 30-day trial.

Fool contributor Dan Caplinger thinks he won't get squat from Social Security, although he'd appreciate some help from Medicare. He doesn't own shares of the companies discussed in this article. Intuitive Surgical is a Motley Fool Rule Breakers recommendation. Pfizer and UnitedHealth are Motley Fool Inside Value selections. The Fool owns shares of UnitedHealth, which is also a Motley Fool Stock Advisor selection. The Fool's disclosure policy solves problems.


Read/Post Comments (5) | Recommend This Article (17)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 18, 2009, at 5:24 PM, rutgers13 wrote:

    Not a very well written article! You have presented a dark picture (probably true), but have offerd no real soutions other thn "take charge of your retirement"....whatever that means? In addition, you seem to feel that one of the negative aspects of the problem is that big drug companies will suffer large cuts to their profits. I feel that could be a solution to the problem rather than a part of the problem! One

    of the primary reasons for the HIGH costs of mrdications is that big drug companies charge consumers huge prices to pay for a very, very high percentage of the researcg costs!!!

    R.Lyon

  • Report this Comment On May 18, 2009, at 5:28 PM, robertf36009 wrote:

    We have all seen how well the government has managed health care for seniors and the poor (medicare/medicade). Do we really want them to manage it for the rest of us? Sure they give assurances that private sector insurance will remain but, everyone knows that, it can't compete with uncle sugar. I woulden't let these clowns manage anything more until they can operate AAMTRAK and the USPS at a profit.

  • Report this Comment On May 18, 2009, at 5:55 PM, jbrt wrote:

    ironic that nothing was mentioned about the prior administraions taking monies from Social Security , chances are had the administrations not used Social Security like a " piggy bank " there would be no such " crisis "

  • Report this Comment On May 18, 2009, at 6:00 PM, jbrt wrote:

    the same medications in Canada and Switzerland are less than ONE THIRD the cost of ones here , R&D ? , thats a joke , more monies are spent on VIAGRA commercials !

  • Report this Comment On May 18, 2009, at 7:22 PM, xetn wrote:

    What money do you think that exists in medicare and social security trust funds? The word "trust fund" is a joke because there is no money in those funds, just an electronic entry. The fact is that all payments for those accounts come from current transfers and the government uses those funds until they have to pay. They could have been investing those funds for a very long term but have not done so.

    Another interesting fact about social security is that when it began in the '30s, there were over 7 people paying to each person receiving. Now I believe it is about 3 paying for each receiving. The simple fact is that this is a giant ponzi scheme that will collapse if serious steps are not taken. But an even simpler remedy would be to just end both of those schemes and let people invest their own funds, with out those silly limits of 401Ks and IRAs.

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Dan Caplinger
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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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