Uncertainty over the future of Social Security can be frustrating. For many Americans, income from Social Security is a critical component of retirement income. The financials surrounding Social Security are not improving. Here are some tough decisions that address this uncertainty.
Social Security: The 2015 report
US News summarizes the annual report for Social Security and Medicare. Here are some key points:
• Social security is funded by payroll deductions paid by both the worker and the employer. Social security is designed to pay a retirement benefit to workers and their dependents- and survivors of deceased workers. According to the report, nearly 60 million people receive social security benefits.
• Medicare covers hospitalization, outpatient care and prescription drugs for the elderly. 55 million retirees and disabled people receive medicare benefits.
• Demographics: Medicare and Social Security account for 40% of all federal spending. As the large population of baby boomers (those born between 1946 and 1964) age, the demand for benefits will increase sharply.
• Funding: Social Security has enough money to pay full benefits until 2035. After that point, the program will only be able to pay 75% of current benefits. Medicare, on the other hand, can pay full benefits until 2030. The system will only be able to pay 86% of benefits after that point.
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That’s the current status of these government programs.
Major changes are coming
Huge financial changes will take place between now and the projected dates mentioned above. The reason is simply math: The federal government must cut benefits, raise taxes- or both. So, the question for all of us is this: What action do I take now to protect myself from this big unknown?
Assume your Social Security income will be lower
Social security provides a benefits calculator. I think the first step is to assume your benefits will be lower than currently scheduled.
Now, politicians are loathe to change the benefits for people approaching retirement. They’re concerned that they will be accused of “violating the contract” they created with people who funded social security with their payroll tax contributions.
And they are.
But the politician has a way around it. They may “means test” the benefits. People at or near retirement who have larger incomes (or more assets) will have their benefits cut. Since these people “have the means” to pay for their retirement, they won’t get the entire benefit payment. Congress can also raise taxes on social security benefits- particularly on those recipients who work past age 65.
So, part one of the solution is to calculate your expected social security benefit- and assume the amount will be lower. No one knows how much- let’s say 25% lower. For example, assume your $2,000 a month benefit will be $1,500. Calculate how much total income you’ll earn from your investments, pension, etc. When you throw in social security, assume it will be the lower monthly income total.
Plan on less Medicare coverage
In the same reasons, no politician wants to cut Medicare benefits for people approaching retirement age. But they can means test the benefit- and raise the retiree’s share of premium payments.
This link explains Medicare benefits. Again, I’d assume that current benefits will require higher premiums and possibly larger out-of-pocket expenses for medical care. Who knows how much- try that 25% number.
To address this issue, you may need to carry supplemental insurance coverage. You’ll need to assume that your medical care will be 25% more expensive. Include that expense in your retirement budget.
Take action- even in uncertainty
You may be reading this post and think: “Well, why should I take any action if the true financial impact isn’t known?” In mathematics of these funding issues will force the government to take some action. There will be a financial impact to all of us. The sooner you start planning for it, the less impact it will have on your retirement planning.
Start taking some action know- and get more peace of mind.
Do you have a family member dealing with these issues? I’d love to hear from you.
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