With the economy shrinking, 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.
Last year, 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 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. Some estimates have Social Security running out of money in 2041 and Medicare using up its reserves in 2019.
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%.
Or 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 -- 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 hold up reasonably well in a recession, that hasn't been the case. For instance, health-care insurance companies like WellPoint
Even big pharmaceutical companies like Merck
Of course, short-term stock movements don't necessarily spell the end of the boom in health care. 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 toward resolving them anytime soon. The current economic problems have everyone focused on the immediate future.
Moreover, with stocks behaving badly, past proposals don't look nearly as attractive. For instance, one plan to divert payroll taxes into private accounts looked like a great idea when stocks had risen strongly, but now seems unlikely to come up again. With a new administration and with workers having taken 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.
For more on getting the most from your investing:
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- Don't miss out on this last-chance opportunity.
