Whether or not you realize it, Medicare, the program that helps cover eligible medical expenses for 40 million seniors nationwide, is in trouble.
The Hospital Insurance Trust could completely exhaust its cash reserves by 2030. If spending were to somehow accelerate, then the HI Trust could exhaust its cash reserves as early as 2022 in a worst-case scenario. Although a cash exhaustion doesn't mean "bankruptcy" for the program, it would mean that Medicare reimbursements would be based solely on the amount of payroll tax revenue being brought in at any given time. Were that to happen, physicians and hospitals around the country could stop accepting Medicare, putting our nation's seniors in a precarious position.
These Medicare solutions probably won't work
There are a number of reasons why Medicare is struggling. A huge influx of baby boomers are hitting the minimum eligibility age (65) each year, and people are living longer than ever, which is pressuring the program to cover a growing group of older Americans. On top of that, prescription drug inflation is handily outpacing wage growth and inflation, causing the cost of treating seniors to rise.
To counter these concerns, a number of solutions to fix Medicare have been proposed by lawmakers. We've heard calls to raise the Medicare retirement eligibility age, means-test Medicare-eligible seniors, and implement prescription drug reforms. Unfortunately, none of these solutions single-handedly fixes Medicare.
With regard to raising the eligibility age, requiring seniors to spend more time covered by private health-insurers could actually cost more, according to a recent study published in Health Affairs.
Means-testing could help reduce some of Medicare's costs, but well-to-do Americans may understandably balk at the idea of paying into a program that may never repay them in the form of benefits. Not to mention that upper-income individuals are already paying surcharges for Part B and Part D, so adding copays or deductibles on top of that may enrage higher wage earners.
Even attempting to reform prescription drug pricing could backfire. Hillary Clinton has called for prescription drug reforms allowing the U.S. government to negotiate better deals with drugmakers, which could temporarily help drive expenses down. However, drugmakers could retaliate by moving their operations overseas, cutting jobs and hours, or even reducing innovation vis-à-vis research and development cuts if their prices are capped.
Ultimately, there may be only one successful solution to fixing Medicare -- and it requires that we recognize that the program's biggest problem isn't any of these aforementioned concerns.
Medicare's biggest problem -- and a possible solution
The fundamental problem with Medicare was highlighted by the Urban Institute in a 2012 publication that examined how much Social Security and Medicare taxes and benefits seniors pay and receive over their lifetimes.
As noted by calculations conducted by the Urban Institute, Medicare beneficiaries are getting substantially more in lifetime benefits than they're paying into the program. By comparison, Social Security taxes collected, on average, tend to outpace the amount of Social Security benefits paid out over one's lifetime.
Based on the example provided by the Urban Institute, which focuses on a single person turning 65 years old in 2010, 2020, and 2030, and earning $44,600 in 2012 dollars, Medicare benefits received outweigh the amount of Medicare taxes paid by a factor of 2.95-to-1 in 2010 and grow to 3.45-to-1 by 2030. In even simpler terms, for each $1 the program brings in via payroll taxes, roughly $3 are heading out to pay for medical care. That's simply not sustainable, and it's a fundamental flaw with Medicare.
The real reason raising the eligibility age, means-testing seniors, or reforming the way prescription drugs are priced won't work is that these factors only address things from the cost side of the equation. If Medicare is going to be successfully fixed for future generations, there's probably going to need to be a higher payroll tax component to complement some, or all, of the aforementioned cost-cutting efforts.
What this means for you
To be clear, this doesn't mean your percentage of payroll taxes will necessarily go up. Congress seems to be trying everything possible to avoid increasing payroll taxes on working Americans. However, it does mean that working Americans would be wise to take the rising cost of healthcare expenses into consideration when figuring out how much they need to save for retirement.
Universally, the smartest move working Americans can make is opening or contributing to a Roth IRA. A Roth IRA is a particularly valuable tool because all investment gains within the account are free and clear of taxation as long as you make eligible withdrawals. Importantly, this means that no matter how much you withdraw from a Roth IRA during a given year in retirement, it won't impact your income calculations for Medicare. In short, a healthy Roth IRA can help you cover unexpected medical expenses during your retirement without causing you to necessarily pay surcharges in Part B or Part D because of your income.
A Roth IRA also comes with the added advantage of no minimum withdrawal requirements, as well as no age contribution limits (which you will find with a traditional IRA). Put plainly, this means seniors have the luxury of letting their nest egg grow if they choose to, and they're able to keep contributing money each year for as long as they live.
There are a number of ways to save and invest for retirement, but with Medicare's future looking a bit shaky, regularly contributing to a Roth IRA could be your best solution.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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