Today it was announced that the Social Security and Medicare systems will run out sooner than expected: Read Story Here. The fact is, Social Security and Medicare have no assets – they are pay-as-you-go systems. They are already broke – the question is how long can the facade be maintained? Money is collected through taxes (both Social Security and Medicare) from current workers and distributed to retirees.
In the past the amount of money collected by those taxes exceeded the benefits the programs were paying, so the government spent the extra money (and borrowed still more money), replacing the cash with treasury bonds. Now they are facing the opposite issue, where the amount of money collected is less than that needed, such that money needs to be taken from general funds (or actually, borrowed from China) to pay current retirees. When the Social Security and Medicare actuaries say that the funds will be exhausted, they mean that the total amount of money that was paid into the program, which is sitting in treasury bonds, will be exhausted.
The trouble is, these treasury bonds are repaid using current government revenues. If the government has no money to pay for current retirees, it cannot simply cash these bonds in to pay for Social Security. If it doesn’t have the money to pay for benefits directly, it also wouldn’t have the money to pay for the bonds that were cashed in – the money comes from the same source.
This means that the system is much more risky than it is made out to be. For example, if the debt ceiling is not raised, the government would not be able to borrow the money needed to pay for benefits. This means that it would need to cut benefits immediately, rather than in 10-20 years.
The other option would be to raise taxes, but it has been shown that doing so actually reduces the amount of money the government collects (after a lag of about a year). This is because fewer businesses are started, businesses move overseas to avoid the higher taxes, or the wealthy simply realize less income for the year. (Because most of their income comes from capital gains from selling stock, businesses, real estate, etc…, they can simply choose to hold onto their assets to avoid paying the taxes.) The resulting reduction in economic activity from these actions (read, lay-offs, plant closings, and people just not being hired/jobs not being created) also results in lower collections from the middle class and increases in the need for government welfare.
The bottom line is to not expect Social Security and Medicare to be part of your retirement. They are unlikely to be there, especially if you are in your twenties or thirties. Even if they still exist, it is likely that the benefits will be very low, maybe kicking in when you are in your eighties.
Instead, save and invest. Raise enough money to provide sufficient income for your own retirement. This means saving up 10-15 times the amount of income you will need each year in retirement. This means putting 10-15% of your income away for retirement each year, especially in your twenties and thirties. If you don’t, don’t say no one warned you when the existing systems are eliminated or cut so much that they are essentially worthless.