In April the trustees of the Social Security and Medicare trust funds issued key updates about the solvency of the programs.  Some of the more crucial points follow:

The Social Security Disability Insurance trust fund will exhaust its reserves in 2016, two years earlier than projected one year ago.
The Social Security trust fund that goes mainly to retirees will be exhausted in 2036, two years earlier than projected last year.
If the funds are combined, they would be exhausted in 2033, three years earlier than projected last year.
In 2011, 44.8 million received benefits from Social Security’s trust fund for retirees, compared with 43.8 million in 2010.
In 2011, 48.7 million people were covered by Medicare, up from 47.5 million in 2010. That means the program is covering on net an additional 100,000 Americans every month.
The trustees said the worsening picture for the Social Security trust funds was due to “updated economic data and assumptions.”
The ratio of workers paying taxes per Social Security beneficiary continued to fall. It will hit 2.8 workers per beneficiary in 2012, down from 3.4 in 2000.
This problem has been years in the making.  In 1965 the ratio of workers to Social Security beneficiaries was about 4 to 1. By 2035 it is projected to be a ratio of 2 workers for every beneficiary.  

“Until now a politically gridlocked Washington seems to have been unable to see that Social Security, like the ‘unsinkable’ Titanic of 100 years ago, is heading for an iceberg.” [1]

Our legislators in Washington DC seem to be paralyzed when it comes to this issue.  And there’s a conflict of interest there, because their jobs are up for re-election every 2, 4 or 6 years.  Legislators risk votes and re-election if they recommend cutting Social Security.

So what does this mean for you?  For now, it depends on your age.  The consensus seems to be that it would be unfair to make significant cuts to current retirees because they have planned around the current rules and don’t have time to rebuild their nest eggs.  However, if nothing is done and the trust fund is exhausted in 2033, all benefits would then be cut by approximately 25%…for anyone collecting at that time.

At JoycePayne Partners, as part of our Financial Planning for clients, we show estimated Social Security benefits as a component of our clients’ retirement income projections.  Depending on a client’s age we often recommend projecting a reduced amount of Social Security.  We do this in order to provide a conservative and more realistic retirement income plan.  Based on the latest news we should continue to reduce estimated Social Security Income in our projections by 25% beginning in 2033.

Medicare is also in trouble.  The Medicare fund that pays for hospital benefits is on target to be exhausted by 2024.  Obviously something has to be done. Proposals include changing the program to give more support to low-income seniors and less to wealthier Americans and raising the eligibility age from 65 by one month per year beginning in 2022.

Retirees must also be prepared to spend more of their income on health expenses.  Recent data from Fidelity Investments reports that you and your spouse may spend $240,000 during retirement on health expenses.  That does not include assisted-living or nursing-home costs.  The estimate assumes that a couple retires when both spouses are 65 years old and that they qualify for Medicare but have no retiree-health coverage through an employer.  It uses a life expectancy of 17 additional years for men (age 82) and 20 years for women (age 85).

A 65-year-old couple retiring this year with $75,000 of household income, including $29,970 in Social Security, should expect that 35% of that Social Security amount, about $10,000 (per year), could be needed to pay health-care costs.  By 2027, their portion of Social Security covering health costs may reach 61% of a $41,000 Social Security benefit, or about $25,000 per year.

What all this means is that Americans may be working longer and will need to be saving more to be able to fund a secure retirement.  How you can act now: if you are currently contributing to a 401(k) or another employer-sponsored retirement plan, consider increasing your contribution.  You can also set up regular monthly contributions to an IRA, or make a one-time transfer (at any time).  Contact your Financial Adviser if you have any questions.