Even with the stock market having restored some life to your investment portfolio, the troubling economy still faces plenty of dire threats. A reminder of one of the biggest ones came last week, when the government released its latest annual report on the prospects for Social Security and Medicare.
If you've followed these numbers from year to year, you've probably gotten accustomed to seeing bad news. But perhaps an even more troubling trend is the increasing volatility in the projections for these government programs. In other words, not only are the future expectations for these entitlements looking worse, but also the estimates vary so much from year to year that it seems as if the government can't really predict its fate with any certainty.
The bad news
According to the trustees' reports for Medicare and Social Security, the two programs are now expected to run out of money sooner than they expected last year. Funds in the Social Security Trust Fund will disappear by 2036, a year earlier than the 2010 report projected. But even worse, Medicare will run out of money in 2024, a full five years sooner than in last year's report. And those projections make an assumption that almost always proves untrue: that current law cutting doctors' fees by 29% next year are actually allowed to take effect.
The trustees make several points about the programs' current funding status:
- The slow recovery, especially in terms of high unemployment, has reduced total wages, thereby reducing the amount of payroll tax revenue that the respective trust funds for these programs receive.
- People are living longer than expected, thereby increasing the amount of benefits they receive over their lifetimes.
- Perhaps most controversially, the report says that projected Medicare costs are 25% lower because of the new health care laws passed last year.
When will Medicare really fail?
Another concern comes from just how much Medicare projections have jumped around lately. The report two years ago expected the fund to become insolvent in 2017 before then extending out to 2029 last year.
The impact of health care reform introduces brand new uncertainty. The report assumes that health care companies will simply accept cost reductions that new laws provide. Yet Medicare represents huge shares of revenue for many companies: 31% of revenue at HCA (NYSE: HCA), 24% at Tenet Healthcare (NYSE: THC), and between 18% and 27% of revenue at Universal Health Services' (NYSE: UHS) three main business segments. Those businesses could face huge problems if Medicare simply expects them to absorb a greater share of the cost of providing patient care.
In addition, Medicare has already extracted concessions from drug companies such as Merck (NYSE: MRK) and Pfizer. They'll now have to offer 50% discounts for some previously uncovered drug purchases by seniors -- costing the industry an estimated $32 billion over 10 years.
What's more likely to happen is for older Americans to have to pay ever-increasing amounts for supplemental Medicare policies. That may open up new opportunities for health insurers UnitedHealth Group (NYSE: UNH), Humana (NYSE: HUM), and Aetna (NYSE: AET) -- although it will also likely raise criticism of their profits as premiums inevitably rise to cover the gap between what Medicare covers and what medical professionals charge for services.
Get ready
The reports have two important conclusions for everyone. First, you need to build your own nest egg to make sure that no matter what happens to the programs, you can provide some measure of retirement income for yourself.
In addition, sooner or later, the government will have to tackle funding these programs. The Social Security report states that an immediate increase of payroll tax rates from 12.4% currently to 14.55% would enable future recipients to receive full benefits. Medicare has more moving parts, but a combination of tax increases and higher premiums for recipients could hurt seniors who are already feeling the pinch from falling investment income and escalating living expenses.
Whether the hit comes from higher taxes, lower benefits, or a combination of the two, what seems certain is that you need to boost your estimates of how much you need to have saved in order to retire rich. If you rely too much on unrealistic assumptions, you could find yourself holding the bag when the bad news finally becomes reality.
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Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance.
