Working Americans and retirees alike are worried about Social Security cuts, and understandably so. In the coming years, Social Security expects to owe more in scheduled benefits than it collects in payroll tax revenue as baby boomers retire in droves and start filing claims.
The program can tap its trust funds to keep up with scheduled benefits for a period of time. But once those trust funds are depleted, Social Security may have no choice but to cut benefits universally for retirees. And that's a possibility in about a decade's time based on the latest trustees' estimate.
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Clearly, Social Security cuts have the potential to be catastrophic for the millions of retired Americans who depend on their monthly benefits for the bulk of their senior income. And given the number of people who are nearing the end of their careers and are behind on savings, future retirees stand to get hurt financially as well.
But while Social Security cuts are clearly problematic, there's another program that's at risk of having benefits cut due to a funding shortfall -- Medicare. And if lawmakers don't address its problems, seniors could be in for a world of financial pain.
Medicare needs a lifeline, too
There's pressure on lawmakers to try find a way to prevent Social Security cuts. But it's not just Social Security they need to pay attention to.
The trust fund that supports Medicare Part A, which covers hospital care, is expected to run out of money in 2036. If lawmakers don't manage to find a way to pump more money into Medicare, enrollees could see a substantial cut to their Part A benefits.
Now it's hard to determine what that sort of cut might look like. It could mean fewer services at hospitals. Or, it could mean having access to fewer qualified providers. But either way, it's not great news.
Furthermore, right now, most Medicare Part A enrollees do not pay a monthly premium to get that coverage. Lawmakers may have no choice but to start charging a Part A premium in the future, which could negatively impact seniors' finances, especially if Social Security cuts end up becoming necessary.
Save now to prepare for the worst
Allowing Social Security to slash benefits would likely plunge an untold number of seniors into poverty. And Medicare cuts could be devastating in their own right, whether they come in conjunction with Social Security cuts or not.
Hopefully, lawmakers will prioritize these issues in the coming years given the importance of securing both programs. But if you're not yet retired, it's a good idea to prepare for Social Security and Medicare cuts, just in case. That means shoring up your savings by boosting IRA or 401(k) plan contributions as you can.
And if you have access to a health savings account, fund it to the best of your ability and reserve that money for your senior years. That way, if you wind up incurring more out-of-pocket costs as a Medicare enrollee, you'll have access to tax-free income to cover them.
