Social Security benefits currently represent approximately 37% of the aggregate total income of Americans aged 65 and older, according to the Social Security Administration.1 But for future generations of retirees, Social Security may represent a much smaller percentage of retirement income. In fact, the 2014 Trustees’ Reports for Medicare and Social Security bring some cautionary forecasts for the future as the nation’s baby boomers put ever-increasing stress on these two government programs.
The 2014 Social Security Trustees’ Report2 indicates that, by 2020, the Social Security Trust Fund will begin operating at a deficit—workers’ payroll taxes combined with Trust Fund interest will not be enough to cover annual benefit payments. The report further estimates that by 2033, assets in the Trust Fund will be exhausted. The slow increase in costs is being driven by well-documented demographic trends: fewer workers to fund the system and more retirees tapping into it. Until 2009, Social Security was running cash surpluses—bringing in more tax revenue than it was paying out to retirees—and these surpluses were expected to last for years. But the Great Recession brought with it a decline in payroll taxes coupled with an increase in benefit claims. In 2010, these factors resulted in Social Security outflows exceeding its income—a pattern that experts say will continue indefinitely.3
The 2014 Medicare Trustees Report2 indicates that the program’s outlook has improved considerably in the past year, and it attributes that good news in large part to the passage of the Affordable Care Act (ACA). Specifically, the trustees found that Medicare’s Hospital Insurance Trust Fund is in good shape until 2030—that’s four years longer than the trustees projected last year—and 13 years longer than they anticipated the year before the passage of the ACA.3
But even though Medicare appears to be in good shape for the time being, serious fiscal issues loom in the decades ahead as the nation’s population ages. Today 54 million Americans receive Medicare benefits. By 2030, when the trustees indicate Medicare will start having financial difficulties, the ranks of Medicare enrollees will hit 81 million and the numbers will keep growing.4
The upshot of both reports is that future retirees may need to depend more on their own resources to fund their retirement. Although it is very unlikely that either program will go away, benefits may be trimmed or payroll taxes increased to support them. Anyone saving for retirement—especially younger workers—may want to keep this in mind when deciding how much to contribute to an IRA or employer-sponsored retirement savings plan.
1Social Security Administration, Fast Facts & Figures About Social Security, 2013.
2 Social Security Administration, Status of the Social Security and Medicare Programs, July 2014, http://www.ssa.gov/OACT/TRSUM/.
3The Center for Retirement Research at Boston College, Social Security’s Financial Outlook: The 2014 Update in Perspective, August 2014.
4The New York Times, Good News and Gloom for Medicare, Wrapped in a Mystery, July 28, 2014.
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Article by Wealth Management Systems Inc. and provided courtesy of Morgan Stanley Financial Advisor.
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