New Reports on Social Security and Medicare May Change America’s Sense of Entitlement

An entitlement crisis has been looming on the horizon for several years. Unfortunately, according to the latest reports from the trustees of the Social Security and Medicare trust funds, a spike in unemployment has helped to hasten the insolvency of these programs’.

In the 2009 annual reports on the health of the entitlement programs, the government revised its projections of the dates when the trust funds will eventually run out of money.

These reports are the latest signals that the federal entitlement system is in trouble. It raises the very real possibility that these government programs may not be able to make as significant a contribution to your retirement income or provide affordable health care.

Social Insecurity

Between December 2007 and April 2009, 5.7 million Americans lost their jobs.¹ Fewer workers means the government is collecting less in payroll taxes, which support Social Security and Medicare. These taxes equal 15.3% of an employee’s total wages, a burden that is divided equally between the employer and the employee.²

The 2009 trustee report projects that the Social Security trust fund will be exhausted by 2037, a revision that knocks four years off the previous estimate.³ Furthermore, the program is projected to sink into a cash-flow shortfall by 2016, one year earlier than previously expected.⁴ A part of the program that subsidizes disabled Americans is scheduled to run out of money by 2020.⁵ This all amounts to the sharpest erosion of the Social Security system since the mid-1990s.⁶

Moreover, as a result of low inflation rates, it is estimated that Social Security beneficiaries will not receive annual cost-of-living increases for the next two years.⁷

“Medican’t”

Even more troubling than the fate of Social Security may be the dire straits facing Medicare, the primary health insurance program for people aged 65 and older. Even prior to the financial downturn, the “Medicare problem” was characterized by David Walker, former Comptroller General of the United States, as “five times greater than the Social Security problem.”⁸ The Medicare problem has only been exacerbated by the recent economic downturn.

The Hospital Insurance Trust Fund, which is already operating in a deficit, is scheduled to completely run out of money in 2017.⁹ The trustee report suggests that, even in the short term, the program will “require substantial changes to program income and/or expenditures.”¹⁰

Trust funds responsible for Medicare Part B (doctor visits) and Part D (prescription drugs) are scheduled to remain solvent for the foreseeable future because of legislation that automatically provides funding for both programs. As a result, however, 25% of Part B enrollees may face large premium increases over the next several years.¹¹

Too Optimistic?

By some accounts, the projections made by the trustees may be understating the problem. For example, these estimates are based on the expectation that the economy will recover by late 2009 and that revenue will increase soon thereafter, before falling into deficits in 2016. If an economic recovery is late in coming, these estimates could prove too generous.

Also, the Medicare report assumes a 21% cut in payments to doctors working for Medicare, as dictated by law. But Congress has cancelled that reduction for the past several years.¹²

Population Problems

In addition to the complications caused by the current economic crisis, part of the insolvency problem facing these entitlement programs is demographic. As more baby boomers enter retirement and begin to collect benefits, the cost of these programs is expected to rise. In 2008, Social Security benefits amounted to 4.4% of gross domestic product (GDP). By 2034, they will account for 6.2%.¹³ Medicare’s annual costs represented 3.2% of GDP in 2008, but they are estimated to surpass Social Security in 2028 and reach 11.4% of GDP by 2083.¹⁴

The trustees reports confirm that these popular entitlement programs are in serious need of reform. Although most people agree that major changes are needed to fix the problems facing Social Security and Medicare, there is a partisan divide. As with most political issues, both sides of the aisle paint drastically different pictures of what an entitlement makeover might look like.

According to a recent survey, 64% of retirees say Social Security is their single largest source of retirement income, and for 32%, Social Security provides more than 90% of their incomes.¹⁵ Considering the uncertain future of Social Security and Medicare, a carefully considered financial strategy may help you prepare to meet more of the funding demands of retirement on your own.

1) U.S. Bureau of Labor Statistics, 2009
2) Los Angeles Times, May 13, 2009
3–4, 9–11, 13–14) Social Security Administration, 2009
5–6) The Washington Post, May 13, 2009
7, 12) The Wall Street Journal, May 13, 2009
8) “60 Minutes,” July 8, 2007
15) Social Security Administration, 2008