Last Updated: May 18, 2009
Social Security, Medicare - it's a problem that policymakers, lawmakers and others will no doubt have to deal with, perhaps sooner rather than later. In the meantime, financial planners suggest that Americans need to consider the conclusions of the just-released reports from the Trustees of Social Security and the Centers for Medicare and Medicaid Services.
According to the reports, Social Security benefits are projected to be adequately funded for the next three decades, but the Social Security trust fund will be exhausted by 2037, four years earlier than expected due to the faltering economy. What's worse, the Medicare Hospital Fund will be insolvent by 2017, years earlier than expected. Learn more from the " The 2009 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust
Funds," and the "2009 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds."
What do these conclusions mean to you? Should you change your financial plan in light of these findings? Financial planners have different opinions about the reports, but in general they say that this news represents a good opportunity to revisit what role Social Security and Medicare plays or will play in your plan.
According to the Employee Benefit Research Institute (EBRI), Social Security, in 2005 at least, was the largest source of income for those then-aged 65 and older, accounting for 40.1 percent of their income on average. Pension and annuities income was 19.3 percent, income from assets 13.6 percent, and income from earnings 24.8 percent. But EBRI also noted that income composition varies significantly across income groups. In 2005, the lowest income quintile (those who had income less than $7,895) among the elderly received 91.3 percent of its income from Social Security, and the highest income quintile (those with income greater than $32,198) received 18.0 percent of its income from Social Security.
In addition to understanding what percent of income Social Security does or might represent in your retirement income plan, financial planning experts say now would be a good time to do what the federal government did with the nation's 19 largest banks — a stress test.
"People might consider conducting a 'personal stress test' in order to project how their financial lives might be affected if/and/or when social program payments are reduced in their retirement years," said FPA member, Lawrence S. Wagner, CFP®, CFA of Rockland Trust Company. "Saving and investing with personal assets rather than relying on social programs is increasingly more necessary in order to live comfortably in retirement."
A financial planner can help you with a personal stress test for your financial plan. Find a planner at FPA PlannerSearch®.
FPA member, Lloyd S Yamada, CFP®, of LSY Financial Group also said the need to become less reliant on Social Security and Medicare is becoming greater and greater. "My advice to the average American is to prepare to take on responsibility for their retirement funding including health care which includes medical, dental and long-term health expenses," he said. "It's time, to wean yourself off of this notion that the government will fund all or part of your retirement through Social Security and your medical care through Medicare. And the earlier you do so the better," Yamada said.
Changes in Social Security and Medicare aren't likely to happen overnight. In fact, in the short-term, planners and others don't anticipate any significant changes in benefits will be made. "But I am fairly confident changes will have to be made eventually," said Yamada.
Given that, planners say it's time to incorporate into your financial plan the potential for both programs to either offer decreased or no benefits in the future. It's time to plan for the worst-case scenario. "The recent news of the accelerated solvency issues in Social Security and Medicare is another sign of the global recession's domino effect on the financial lives of everyday Americans, even those without equity market exposure," said Wagner. "Reduced employment equals reduced revenue for all government social programs at the exact time that social programs are called upon to increase payments."
Other planners, meanwhile, suggest not paying much heed to the numbers that make long-range projections. "I don't think it changes anything," said Richard B. Wagner, JD, CFP®, of InsideMoney.org. To the extent that Medicare would run out of money one year sooner than last year's projection is, according to Wagner, "statistically meaningless for individuals."
What's more, he said Americans need to skeptical of all numbers that purport to be any kind of specific in the long-term. "As we have just discovered, reality never reflects anticipation," Wagner said.