For millions of Americans, Social Security is arguably the most important social program. Data from the Social Security Administration shows that 61% of all retired workers count on their monthly Social Security check to account for at least half of their income. Without this income, millions of additional seniors would likely be living in poverty.
Unfortunately, the foundation of this critical program is crumbling under the weight of demographic changes. These changes include the ongoing retirement of baby boomers at an average rate of more than 10,000 boomers per day, a steady lengthening of life expectancies, and pervasive income inequality that's allowed the rich to live longer and pull in a larger Social Security paycheck than lower-income folks. By 2034, the Social Security Board of Trustees projects that an across-the-board cut in benefits of up to 23% may be needed to keep the program solvent through 2091. This forecast has a lot of seniors and soon-to-be retirees calling for Congress to do something now rather than later.
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Medicare is in deep trouble
However, when push comes to shove, Medicare is actually in worse shape than Social Security. Medicare covered nearly 57 million people in 2016, of which roughly five out of six are senior citizens aged 65 or older. Last year, Medicare went over budget by $5 billion and required $679 billion in expenditures from the federal government, equating to 3.6% of U.S. gross domestic product. But by 2091, based on the intermediate set of growth assumptions for healthcare costs and the U.S. economy, Medicare's annual expenditures could equate to 5.9% of GDP, putting it on track to be a costlier program than Social Security.
Now here's where things get really dicey. According to the Medicare Board of Trustees' 2017 report, the Hospital Insurance (HI) Trust, which covers expenses associated with Part A (in-patient care, surgeries, and skilled long-term care), could completely exhaust its current $199.1 billion in asset reserves by 2029. The reasons for this excess cash depletion are similar to Social Security's in that the qualifying base turning 65, and therefore eligible for Medicare, will soar, right along with medical expenditures.
Though the program is expected to bring in a surplus of cash each year until 2022, just like Social Security, it has a considerably smaller margin of error. Whereas Social Security has $2.91 trillion in excess cash as of July 2017, which essentially equates to three full years of expenditures, the HI Trust's $199.1 billion in excess cash only equates to 67% of the estimated annual expenditures for Part A in a single year. In fact, Medicare hasn't had enough extra cash in its coffers to equate to a full years' worth of expenditures since 2003.
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What happens if Medicare exhausts its asset reserves?
So, what happens if Medicare runs out of its asset reserves? According to the predictions from the Board of Trustees, reimbursements to hospitals and physicians would drop by 12% to 88% of their current levels. In effect, Medicare would become a budget-neutral program that pays out in benefits what it generates from its 2.9% payroll tax on all earned income. The obvious fear is that while Medicare is accepted in well over 90% of hospitals now, acceptance could plummet if reimbursement rates fell to 88% of their current levels.
The fix, per the Medicare Trustees, is a payroll tax hike. The estimated HI Trust actuarial deficit for the long-term (defined as the next 75 years, through 2091) is 0.64% as of 2017, down 9 basis points from the previous year. Believe it or not, lower spending and lower projected utilization of inpatient hospital services in 2016 helped push the actuarial deficit down year over year.
In plainer terms, Medicare's payroll tax would need to be raised by 0.66% today (so, 2.9% + 0.66% = 3.56%) to have enough money in the HI Trust to cover expenditures through 2091. If you're employed by someone else, you're only responsible for half of your Medicare payroll tax (1.45%), with your employer covering the other half, meaning the projected increase to you would only be 0.33% of your earned wages for the year. For the average American earning $30,000 annually, we're talking about an extra $100 out of pocket a year for Medicare. If you're self-employed, you'd owe the full 0.66% increase.
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Consider an alternative
In one sense, the American public has to hope that Congress gets its act together and fixes Medicare soon. As with Social Security, the longer lawmakers wait to act, the costlier it will be to fix. However, we can't simply rely on Capitol Hill to fix our problems. Instead, seniors have to be willing to weigh their options.
For millions of seniors, Medicare may remain their smartest choice in retirement. The possibility of supplementing their care with a Medigap plan to cover unexpected out-of-pocket expenses may offer the best care and financial protection for a number of seniors.
Then again, considering an alternative plan known as Medicare Advantage may be your best bet. Medicare Advantage plans are offered by private insurers that have contracts with the federal government. Medicare Advantages plans roll all of the basic components of Medicare -- Part A, Part B (outpatient services), and Part D (prescription drugs) -- into a single plan. They can also add coverages such as dental, vision, and hearing, which aren't covered by traditional Medicare. Medicare Advantage plans also have an annual out-of-pocket limit, which isn't true of original Medicare (and thusly why a Medigap plan can be so important).
But are Medicare Advantage plans perfect? No. You'll have to jump through far more hoops if you want to receive specialized care, and it's possible your copays for certain types of care could be a bit higher than under traditional Medicare. While not perfect, around 30% of Americans chose a Medicare Advantage plan in 2015, up from 13% in 2005. These figures suggest that private insurers are doing something right, which means you'd be best served by taking the time to see if a Medicare Advantage plan would be the best option for you during retirement.
