Social Security & Medicare Are in Trouble . . . And the Solutions Might Hurt

It’s no secret that our government is facing some critical challenges to keeping Social Security and Medicare solvent. And no topic is more important than Medicare and Social Security to the well-being of today’s older voters — and younger workers who will come to rely on the program. Nearly all Americans pay into the programs and expect to receive a benefit. And because no financial system is complete without both income and health care components, I am intimately familiar with just how concerning these topics are for those preparing for retirement in the future.

When Jen and I meet with folks, it’s crucial that we discuss both. Social Security benefits factor into a retiree’s income plan, whereas Medicare is an important consideration for future health care expenses. So, it’s important to understand what and how much we can reasonably expect to receive in benefits in order to fill the gaps in our plans. The solutions to making these programs solvent could take numerous forms and it’s not surprising that the Washington Wizards on capitol hill don’t necessarily see eye-to-eye. So, this week I’d like to spend our time together outlining some of the solutions being tossed around and what their potential consequences could be to you.

The key problems we are facing is that Social Security will be unable to pay full benefits a year earlier than previously projected, while Medicare’s insolvency date remains just five years away, according to the latest trustee reports. There are a number of reasons for our current state, and COVID-19 has only exacerbated this problem. According to the 2021 Social Security Trustees report, Social Security’s reserves will become depleted and tax income will be sufficient to pay just 76 percent of scheduled benefits. The Hospital Insurance (HI) Trust Fund, or Medicare Part A, which helps pay for services such as inpatient hospital care, will be able to pay scheduled benefits until 2026, the same year as reported last year. At that time, the fund’s reserves will become depleted and continuing total program income will be sufficient to pay just 91 percent of total scheduled benefits₂.

Get this, nobody in the nation’s capital is stepping up with proposals to fix the two largest federal entitlement programs. And unfortunately, these are not new issues. In fact, back in 1996 the American Academy of Actuaries published a whitepaper₁ titled, “Solutions to Social Security’s and Medicare’s Financial Problems” which outlined key financial problems with each program and proposed a number of potential solutions. To date, there has been no significant action taken by Congress to improve these programs’ long-term sustainability.

For example, former President Trump, in one of his 2020 State of the Union addresses, pledged that “we will always protect your Medicare and we will always protect your Social Security. Always.” But his administration took no steps to address the solvency problems of the Social Security Trust Funds. Republican lawmakers speak often about reining in entitlement spending, but specifics have been absent during the Trump years. Democrats, for their part, often advocate for expanding benefits, but have yet to propose a plan to fund both the current benefits let alone an expansion.

And while shortfalls are nothing new for Medicare Part A – they generally are the result of rising healthcare costs – this is only the second time insolvency has been predicted within five years.  Currently there appears to be little to no appetite from either political party to actually cut benefits. And the solutions that make the most sense to me likely involve additional revenue. Cutting Medicare benefits just makes no sense, considering the precarious financial health of many retirees: half of Medicare beneficiaries lived on incomes below $29,650 in 2019 and 25% had incomes below $17,000, according to the Kaiser Family Foundation₃.  

And yet, while the public’s worry about the future of these programs is understandable, it’s “out of proportion”, says Paul Van de Water, a senior fellow at the Center on Budget and Policy Priorities, a left-leaning think tank. “The odds that benefits are going to disappear are as close to zero as possible,” he said. “But the continual talk about the financial problems leads people to worry excessively about it.”  And the mainstream media is of no help.

If the problem is not solved before the 2035 depletion date gets near, experts note that odds will favor restoring solvency to the trust funds with new revenue — rather than benefit cuts. That is because any benefit cuts almost certainly would not be applied retroactively to current beneficiaries, Mr. Van de Water said. “That means the cuts could only apply to new beneficiaries, with the possible exception of a less generous C.O.L.A., which would affect people receiving benefits now, and in the future,” he added.

With that constraint, it would be difficult to avoid insolvency relying on benefit cuts. New revenue could come from tax increases — or Congress could decide to inject general revenue into the program. Perhaps the biggest risk of delay is that it fuels public pessimism and worry about Social Security’s future. And still, it’s quite feasible that this just gets punted for another four years.

Outside of Congress, think tank experts and other reform advocates emphasize the narrowing window of opportunity to address long-standing problems with Social Security and Medicare. I believe that we need leaders in both parties to get serious about fiscal matters in general and about middle-class entitlements in particular. Until that changes, politicians will likely continue to promise benefits that the government can’t deliver.

So how do you build your retirement system with these crucial unknowns? The key is to build a strategy that anticipates any number of potential outcomes. Having a “Plan B” can help alleviate your worries because you’ve considered the what-if’s and you’ve prepared for any outcome.

So as always – be vigilant and stay alert, because you deserve more!

Have a great week folks.

Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, and Mansfield, MA. Insurance offered through its affiliate, CutterInsure, Inc. We do not offer tax or legal advice. Jeff can be reached  at jeff@cutterfinancialgroup.comThis information is intended to provide general information. It is not intended to offer or deliver investment advice in any way. Information regarding investment services is provided solely to gain a better understanding of the subject of the article. Different types of investments involve varying degrees of risk, including the potential for loss. Therefore, it should not be assumed that future performance of any specific investment or investment strategy will be profitable. Insurance product guarantees are backed by the financial strength and claims-paying ability of the issuing company. Market data and other cited or linked-to content is based on generally-available information and is believed to be reliable. Cutter Financial does not guarantee the performance of any investment or the accuracy of the information contained in this article. Cutter Financial will provide all prospective clients with a copy of Cutter Financial’s Form ADV 2A, Appendix 1, applicable Form ADV 2Bs and Form CRS as well as the firm privacy policy. Please contact us to request a free copy via .pdf or hardcopy. 1. https://tinyurl.com/8amwttzc 2. https://tinyurl.com/3bxessv7 3. https://tinyurl.com/4ds2j8xf