The Numbers Don’t Lie

The 2012 Retirement & Politics Survey by Allianz Life Insurance Company of North America has found that those the survey defines as “Transition Boomers” — people between the ages of 55 and 65 who are less than 10 years away from retirement — see rising health care costs and Social Security as having the greatest impact on their retirement outlook.  According to the survey, 67 percent of all Transition Boomers listed health care expenses as their top concern. Social Security ranked second at 53 percent.  The survey was conducted this past September 17-20 among a random sample more than 1,200 Baby Boomers.  

These fears are not without merit.  Social Security and Medicare, which provide retirement income and health insurance coverage to American seniors, account for nearly half of all federal spending. We Boomers (all of us, not just the Transition Boomers) are more than 75 million strong and the first of us turned the traditional retirement age of 65 just last year.  Because there are so many of us, the ranks of the retired will continue to grow while the ranks of those supporting us – via paying for entitlements such as Medicare and Social Security – will continue to shrink.  We’re living longer too.   In 1950, the average American lived for 68 years and more than 16 workers supported each retiree. Today, the average life expectancy is 78 and fewer than three workers support each retiree. Health care costs continue to explode higher as well.

For the vast majority of us, our retirement planning will mean little without the foundation provided by Social Security and Medicare.  For low-income people, Social Security replaces up to 90 percent of covered wages. For higher income workers, those who earned the maximum Social Security wage for 35 years or so, the rate is only about 28 percent.  Even so, unless Social Security and Medicare are shored up in a comprehensive and fiscally responsible manner, whatever else we Boomers do to plan for retirement will be much less significant, if not irrelevant.

Each year the Trustees of the Social Security and Medicare trust funds report on the current and projected financial status of the two programs. The most recent annual report yet again says that the finances of Medicare and Social Security are in serious trouble.  The Congressional Budget Office projects that if Medicare retains its current structure, it will be bankrupt by 2022. Social Security’s chief actuary calculates that a 23% cut in benefits in 2036 will be required in order to maintain solvency of the Social Security Trust Fund.

Unfortunately, as the current election season demonstrates, there is little demand for Social Security and Medicare reform and little political will to move this issue forward.  Not surprisingly, we want more and better benefits but we don’t want to have to pay for them. That said, a number of reform proposals have been put forward.

Proposed Social Security reforms range from relatively simple and limited adjustments (such as changing the benefit formula, tax rate and/or full retirement age) to more aggressive approaches (including means testing or even a diversion of workers’ payroll taxes into individually owned and dedicated private retirement investment accounts).  Despite this wide range of Social Security reform proposals, the program can be shored up reasonably well with relatively modest changes.  Change has to happen but no major overhaul is required.

Medicare, on the other hand, is much worse off and requires a much more aggressive response. The $38.6 trillion in unfunded benefits Medicare is expected to pay over the next 75 years equals $328,404.43 for each of the 117,538,000 households the Census Bureau says were living in the United States in 2010.  The Medicare problem is a big one.

As Forbes has reported, the American Medical Association’s key policy committee, the Council on Medical Service, recently voted to endorse a Medicare reform plan that shares key traits with those proposed by the Romney campaign. Ironically, despite these similarities, the AMA Council’s report states that it came to this view based upon the advice of Bill Clinton’s former budget chief, Alice Rivlin.  Proposed Medicare reforms offered by others include (a) adjusting the Medicare eligibility age to reflect gains in life expectancy; (b) capping out-of-pocket costs to protect recipients from bankruptcy in the event of a major illness; and (c) requiring wealthier beneficiaries to pay higher premiums. 

Despite the political unpopularity of being seen as cutting benefits to seniors, serious changes are needed.  But getting reform implemented is likely to be politically difficult because there is so little perceived “upside.”  No matter how necessary, “reforms” that result is lower benefits or more limited accessibility to benefits are not politically popular. Historically, Social Security reform has been the “third rail” of American politics.  Medicare is highly popular as well.

Predictably, therefore, representatives of the primary political factions continue to blame each other for the overall problem but do nothing.  It’s easy to blame Congress (with good reason), but we as a nation do not demand more and better from them either.

If we continue to do nothing, things will only get worse.  Right now, the ratio of those 65 and older versus those 15-64 is right around 20%. By 2035, it’ll be closer to 35%, meaning that many fewer workers will be supporting many more retirees. 

 In 1962, about 32 cents of every federal dollar, excluding interest payments, was spent on public “investments” such as defense, infrastructure, long-term research and education.  On the other hand, only 14 percent of every federal dollar was spent on entitlements like Medicare and Social Security. Today we spend less than 15 cents on such public investment but a whopping 46 cents on entitlements. By 2030, when all the Baby Boomers have started collecting Social Security, entitlements will consume fully 61 cents of every federal dollar.  Whatever political priorities one might choose as appropriate investments in our children’s future in this election season, without entitlement reform we will not be able to afford them.

Since the inception of Social Security and Medicare, these programs have provided benefits to all who have worked in covered employment for a sufficient period and to their dependents and beneficiaries, without regard to wealth or other income. This universality reinforces the idea of Social Security and Medicare as an earned right, and is crucial to the programs’ ongoing popular support. These related concepts – earned right and universality – distinguish Social Security and Medicare from other government income-maintenance programs, such as welfare, food stamps and Medicaid, which provide benefits only to those who are deemed to need them.  Not surprisingly, these latter programs have all been subject to major overhauls or benefit cutbacks in recent years.

Those approaching retirement are justly terrified about healthcare costs and the stability of Social Security.  Many also fear that “reform” will effectively kill Social Security and Medicare.  But the reality is that they will necessarily die on their own without some significant changes.  Our retirement planning efforts are not going to mean much unless we address the ongoing issues we have with Social Security and (especially) with Medicare. The numbers don’t lie.