Social Security is said to be the third rail of American politics. A politician who even mentions cutting benefits risks being tarred and feathered. Perhaps the greater evil than threatening to cut benefits is to act like you won’t need to.
Right now there is a great looming liability hovering over the US Government. As Cox and Archer discuss, Social Security and Medicare benefits are projected to cost about $85 T more than they take in from payroll taxes. You see, Social Security was designed to be a pay-as-you-go system where the money taken in from current workers goes to pay for current retirees. This works fine if there are the same number of people in the population at any given time.
The issue is that there are a huge number of people in the Baby Boom generation who are starting to retire, and far fewer people coming after them who are working. This generation paid more than enough to fund their benefits, but all of the extra money was spent on other things, leaving only a set of IOU’s in the vault. This would be fine if the money were actually loaned out to entities who could be expected to pay the money back, but since it was lent to the Government itself, if the Government is not making enough in current tax revenues to pay Social Security benefits, it won’t be able to pay the IOU’s either. The inability, or non-desire of recent graduates to get a job and start paying into the system is only exacerbating the problem, as has the record number of people going onto Social Security disability in recent years.
The issue with Medicare is even worse. The taxes on Medicare have never been enough to pay for the nearly limitless benefits that are provided. As is the issue with all medical insurance, because the recipient pays the same no matter what, there is no incentive to keep costs down. It is doubtful that many people would pay $300,000 out of their pockets for a surgery that would extend their life by a year, even if they had it sitting there in the bank. Because the bill is being paid by Medicare, however, the cost does not matter. Having a lot of people who are not paying, and having doctors who prescribe a lot of procedures out of fear of lawsuits if they don’t and do things in an inefficient manner to jump through the Medicare hoops also doesn’t help.
For many years the trustees of Medicare and Social Security have been warning that the programs will soon go insolvent. Now, with US debt approaching the point that we will be unable to borrow any more, and with both Social Security and Medicare starting to pay out a lot more than they take in, it is perhaps a matter of only a couple of years before we’ll see severe cuts.
Despite this looming certainty, there is no warning coming from the politicians who should know better. It is evil to tell people they will receive an income and healthcare when they are old and unable to take care of themselves when it will not be there. This is like leading a group of people out into the desert, telling them there is a resort waiting for them so that they come only prepared for the walk out, and then leaving them there without water or food. Perhaps if people know that there will be no $1600 check coming in each month or Government-provided health insurance, they will do things differently while they are still young and working. They will save more. Children will make plans of how to take care of Mom and Dad.
Much was said about “Mathematics” during the campaigns this fall. The levels of obligations far exceed any revenues that could be generated by taxes. The math is very simple and very clear that the party will be ending soon. Now is the time to start planning for a future without Social Security and Medicare. Cut expenses. Don’t buy a house you can’t pay off before you are retired. Save enough to be self-supporting when you are older. If you have aging parents who have not saved, start planning on how you will take care of them, perhaps getting an extra room in your house ready. Acting like an osterich with your head in the sand will not change the math.
Please contact me via email@example.com or leave a comment.
Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI
Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.