Sunday, March 24, 2013

The Future Paths of Social Security and Medicare Explained

Everybody seems to have an opinon about the future paths of Social Security and Medicare, respectively.

Unfortunately, most of these opinions are based on what people have heard from others rather than reliable information.

So let's get into the facts and learn what's likely to be the good and bad associated with the future of these two vast but poorly funded entitlement programs.

Making Sense of Social Security and Medicare provides a good basic background explanation of the situation as it is and likely will be in the future:

"Social Security, Medicare and other earned benefits make up, by far, the largest portion of the federal government's expenses.

They also are among the most misunderstood. . . .

Q: Will I receive Social Security benefits?

A: That's a big "It depends." If you're over 65, no sweat. If you're 45-65, you might see some changes from the relatively generous benefits enjoyed by your parents. If you're under 45, you have plenty to worry about.

The problem is more money is being paid out of the system than is going in. The shortfall, now about $200 billion a year, is being made up by drawing on the $2.73 trillion Social Security Trust Fund. {MY NOTE: There is no 'real world' trust fund. It's an accounting fiction. The government actually has no money of its own. We owe $16 trillion instead and are adding to the debt each year by running deficits.}

The fund is U.S. government bonds that have been bought by the Social Security Administration for 30 years with money paid by baby boomers. They have spent most of their working lives paying more into the system than it spent.

The extra money was lent to the government, which used it to offset some of the huge deficits of the 1980s and 2000s. (Without the overpayments, the government surplus in the late 1990s wouldn't have happened.)

Now, the retiring boomers are taking out more than younger workers are putting in. According to current estimates, the trust fund could be fully tapped as soon as 2033.

Q: So what's going to

A: Time is running out, and the gridlock in Washington isn't helping.

Among possible solutions? Changing the way cost-of-living adjustments are figured, reducing benefits slightly now, but far more over the long haul. Other suggestions range from raising the eligibility age to 70, to reducing benefits for wealthier retirees, to raising taxes.

Count on Social Security, in one form or another, being around for a long, long time. But don't count on it to be as generous as it was in the past.

Q:What can I do about that?

A:Save. Save. And save some more. Social Security was always meant to be a supplement to savings, family support and pensions.

A recent survey from Banker's Life and Casualty found that two-thirds of middle-income wage earners believe Social Security will pay at least half and some as much as 75% of their retirement costs. Some Americans consider Social Security their major income stream during retirement. Bad idea.

Social Security alone isn't going to cover the lifestyles they are accustomed to—not including health-care costs.

Q: Speaking of health care. I understand Medicare is in worse shape than Social Security.

A:You bet it is. The Government Accountability Office estimates the 75-year funding gap will be a staggering $76.4 trillion. The Medicare Security Trust Fund could run dry as soon as 2016, according to a 2011 report from the trustees. And the system is rife with fraud and abuse, costing us nearly $100 billion a year—yes, a year—according to some congressional estimates.

To make matters worse, the government can't seem to get its long-term projections in line. Just last month, the Congressional Budget Office slashed its 10-year budget projection by $143 billion, or 2.2%. It noted that spending was "significantly lower" than projected the last three years, thanks mostly to technology and somewhat to legislation. Is that a trend or a recession-related blip?

By some estimates, we will receive health care that costs three times what we paid into it in our lifetimes. Clearly, that's unsustainable and the only way out is to cut benefits or up the individual ante—neither of which garners much enthusiasm from, well, anyone.

But, like Social Security, some form of Medicare will be around for some time though you can expect that it will be parceled and pared down considerably."

Summing Up

It's always a good idea to know the facts.

And the facts are that our current Social Security and Medicare programs (before ObamaCare) are programs that have long been underfunded.

And now with the aging of the baby boomers and the introduction of ObamaCare, the underfunding has reached the crisis stage. Political and societal can kicking is about over.

So as we begin to fund these programs with more money, we will of necessity take that money from the paychecks of America's current workers.

And as we tax current workers more, we will need to be careful not to leave them with less money to spend and invest in the U.S. economy.

Of course, that lower spending and investment would mean fewer jobs than would otherwise be the case, as well as lower tax receipts for the government.

Accordingly, as individuals we need to understand that this simply means that our government entitlement programs won't fully take care of our retirement and health care needs. We the People will have to do more of that for ourselves.

More of us working, saving and investing will be vital to the well being of future generations of Americans.

And we will also need to provide affordable and high quality educational opportunities for our youngsters.

That's the daunting challenge for all Americans in the years to come.

But we'll get it done and all be the better for having done so. At least that's my take.

Thanks. Bob.

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