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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:
- The economy remains firmly mired in recession, with big doubts about when growth may come back.
- The stock market is down more than 40% since late 2007.
- Home prices are still looking for a bottom -- and a new wave of potential problems could be just around the corner.
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.
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