As some of us get closer to retirement, programs like Social Security and Medicare become more important to us. We have paid into these programs with every paycheck we have earned. There has been an implied promise that these programs would add financial security to us in our retirement. These programs are not entitlements, since we have paid for them with involuntary deductions from our paychecks, earmarked for Social Security and Medicare.
Each year the Office of the Chief Actuary, publishes “A Summary Of The 2016 Annual Reports.” This is a summary of the Trustees Report of the Social Security and Medicare Boards of Trustees.
Here are some amazing facts from the summary.
“Social Security and Medicare together accounted for 41% of Federal program expenditures in fiscal year 2015. “
“The OASI (Old Age and Survivors Insurance ) and DI ( Disability Insurance ) trust funds are by law separate entities. However, to summarize overall Social Security finances, the Trustees have traditionally emphasized the financial status of the hypothetical combined trust funds for OASI and SI.”
“The Trustees project that the combined trust funds will be depleted in 2034, the same year projected in last year’s report.”
If changes are not made, reserves will be depleted by 2034, and estimates are that benefits will have to be cut by 25 per cent.
Medicare is in worse shape.
“The Trustees project that the Medicare Hospital Insurance Trust Fund will be depleted in 2028, two years earlier than projected in last year’s report.
The Conclusion of the report is that Lawmakers should take steps that would reduce or eliminate the long term financing shortfalls in Social Security and Medicare, and that it should take those steps sooner rather than later.
There are not any easy decisions to make. All decisions will be negative to some or all of our population.
There are two narratives that are harmful to the discussion. The first narrative is that we need to add benefits to these programs. The premise of groups that support increasing social benefits is that our country has too much income inequality. Too many people have reached retirement age and have not sufficiently saved for retirement. Another point is that the COLA increases are not sufficient for lower net worth retires that are facing higher expenses. While it would be nice to be able to increase the social security benefits, we cannot raise the benefits for a program in its current state. Proponents of raising benefits want to raise the amount of income subject to social security tax. Unfortunately, we will have to do that anyway in order to maintain current benefits.
The second harmful narrative is what I call the blame game. In other words, making Social Security and Medicare a political issue to demonize political opponents. This works both ways and is unconstructive. The republicans and the democrats have not secured the tax money that was paid by workers and employers for social security. This is one reason, not the only reason, that these programs are facing fiscal challenges. Several organizations and politicians have used this issue to demonize people that want to fix a system. Our politicians would do the citizens a great service by working to educate the public about the fiscal challenges of these programs and not accuse those who want to fix these issues of starving their grandparents. This has been going on for decades. Stop it already.
In the past year two major changes were made to help stabilize social security. One was to take away a method of filing that benefited a married couple, where one spouse earned more than the other. Another change, late in the year, changed the amount of income subject to social security tax.
Both of these measures were changed quietly, without much news coverage or fanfare.
Some other proposed changes are being considered.
Raising the full retirement age would lower the amount of years, someone would collect Social Security. This would probably change gradually. Most proposals I have read about would add 3 months to the full retirement age each year, until the full retirement age was 68. These proposals would also let you delay the maximum age until you begin drawing social security to 72.
That shrinks the amount of time between when you start collecting social security, and are seriously considering knee or hip replacement.
You would probably still be able to collect at age 62, but the monthly benefit would be less.
Increasing the amount of income that is subject to social security tax is probably going to happen. In 2016 the amount of income tax subject to social security tax was $118,500. The way it works now is that you pay 6.2% of your wages for social security, and your employer pays 6.2% of your wages for social security. This tax is assessed on the first $118,500 of income. It is a substantial tax.
Starting in 2017, the amount of your payroll subject to social security tax will increase to $127,200. Proposals for improving the fiscal health of social security include raising or uncapping the amount of income subject to social security. Other proposals call for increasing the 6.2% rate.
Means testing is another area under consideration. Means testing is a method of denying some citizens the benefit they paid for, because they have been successful enough and do not need it as much as lower income citizens.
New formulas for calculating COLA, (cost of living increases) are under consideration. This would lower the annual increases provided by social security.
Longevity Indexing is another topic being discussed. This would link Social Security benefits to population wide longevity changes. If the population continues to live longer, the Social Security would lower the benefits being paid. This would mean that benefits would fall behind inflation. The older you are, the lower your purchasing power would be. If you combine that with a reformulated COLA, you will have a rapidly diminishing purchasing power.
You may be getting the feeling, and you would be correct, that are not any painless solutions. This is the reason that politicians have a hard time confronting this problem. Try not to attack the messenger, or the people brave enough to suggest some solutions. It is a national problem. We have to be adults, educate ourselves, and encourage our politicians to work together to start fixing the problem. The longer we wait, the more drastic the negative changes will have to be.
In closing, it should be obvious by now that you need to take personal responsibility for your own financial planning for retirement. The government has made promises that they do not have the ability to keep. This will play out in reductions of benefits and increases in taxes. Social Security is the focus of this article. Medicare and some pensions are also suspect.
Now is the time to take your ownership of your retirement plan. Most people need to save more. I have seen people of average means that have excelled in saving for retirement, and I have seen people with high net worth, who have done a poor job saving for retirement. I know it can be done.
I think Social Security will be there for everyone reading this article. But I think a lot of people miscalculate the purchasing power their social security check will have after reduced COLA’s, taxes, and increased Medicare payments.