What’s Up with Medicare?

2010 and 2019—these are 2 very important numbers in your head. The first represents the year where we will start paying out more money than we take in. Those of you who did those rates of change problems in Calculus know that it won’t take long for the money tank for such a system to empty—which brings us that second number—2019, where the Medicare system is expected to be bankrupt. What’s scary is that the current candidates left in the Presidential race aren’t speaking about it.

From the LA Times:

Sen. John McCain of Arizona, the presumed Republican presidential nominee, had little to say when the latest numbers were released projecting Medicare going into the red by 2019 and Social Security following in 2041. The Democratic contenders, Sens. Barack Obama of Illinois and Hillary Rodham Clinton of New York, also sidestepped the issue.

Most of the people who read this are not planning to lean to heavily on Medicare anyway, resorting instead to building a strong 401(k), work benefits plan, or IRA to provide them with the needed funds to handle medical expenses in their old age. At least I hope so. But your parents and grandparents most definitely will. And the Medicare program is in serious trouble, even more so after the Part D prescription plan was added in 2003.

Expect the candidates (except maybe for McCain) to adopt the populist solution:

Tax “The Rich.”

Social Security operating in the red? Tax the Rich.

How about that Universal Health Care? Roll back those tax cuts on The Rich.

How to keep Medicare solvent? You got it.

But no one talks about the outlays (the cost). Rolling back the rich folks’ tax cuts (which means any person, family or business making 200,000+) won’t cover all of this. Which brings us to two solutions: either admit that everyone will have to shoulder an increased tax burden, or admit that some of these programs will unfortunately have to go or benefits will have to be sliced.

Let’s be frank: if the operators of Medicare and Social Security were a private business, investors would be running scared from them. Now imagine if the US Government forced you to own shares in the business… Now I know that these entitlement programs have been around for awhile but they were never meant to fund your retirement—it was simply meant as a supplement to retirement income. At some point some tough decisions will have to be made. Taxes will need to be raised. On everyone. Benefits will need to be cut, especially for younger Americans who have the opportunity to own and fund 401(k) accounts…or IRAs…or start successful businesses—like we always have.

So keep your eye out for Medicare, Social Security, and the coming burden of Universal Health Care. One would hope we can have these things and not pay for them, but if we want them, we will have to pay one way or another.

Your Thoughts?

The "Future" of Social Security

The "Future" of Social Security is in doubt.

So this week I wanted to explore in depth the impact of the Social Security issue. I was inspired to write this from an extension of a highly-debated article written over at Free Money Finance. You can read his excellent article in its entirety [here]. To summarize, he looked at the impact of allowing workers take a look at contributing their own money into a fund rather than having the government do it for them. Turns out that the contributor would be entering retirement with a nest egg of nearly 1 Million Dollars! It may not sound like much, but imagine having a million dollars paid to you in retirement assuming that you would've paid off your house and car!

Well, back in Reality, it probably won't happen. Social Security after all is not a retirement program, but I'm not convinced that it's even security. The program is showing signs that it's no longer sustainable, and younger workers are all quite aware that they're paying into a system in which they will see very little benefit.

To illustrate, let's look at Social Security like a pot. You and your friends contribute a portion of your money into a pot, which will be distributed to older folks who have little or no pension and are too old to work—you don't want to put the elderly on the street. The system continues, so when you get older, you get to pull from the pot while younger workers pay in, and the cycle goes on. In theory, at least.

However, you don't get out as much as you put in because there are more people retiring than entering the workforce. More people living longer, and a shrinking ratio of workers are paying in. To exacerbate things, the money distributor (the US Government) decided that the program was working so well, that they can use some of the "surplus" money to pay for other things and write IOUs.

Well, that's the problem we have today. The ratio of those putting in vs. those taking out is shrinking. So the government has tried several "solutions" to keep the system sustainable. One example: raising the age at which you can take money out, and/or lowering the amount of money you can take out. These are only temporary fixes and you can see that as people live longer it gets harder to do that. And if you are a black male, the stats say you'll die before you're eligible to receive SS funds anyway.

Which is why I don't think it's that bad of an idea to allow younger workers to take a portion of their earnings and to place it in an account of their choice to collect a higher return on the money put into the system. At the rate we are moving now, we won't have enough "government security" to ensure any person any respectable amount of money in the future. And remember—government employees are on a totally different plan than most Americans, so don't expect them to take more than a cursory interest in your future.

So, as a younger worker, I encourage you to plan for your future as if the government will stick you with the raw end of the deal. Inquire about 401(k) programs as soon as you start working and also start contributing to IRAs before you budget yourself to a point where you "can't afford" to contribute. Then, if the feds do find a good way to keep Social Security solvent, you won't be depending on that government check.