Funds for Social Security and Medicare will run out sooner than earlier expected, according to a new report.
The grim prognosis for Social Security and Medicare delivered by trustees of those programs has advisors scrambling to make sense of the short- and long-term ramifications of the stark numbers revealed in the report.
With growing unemployment stemming from the recession, tax revenue that feeds the Social Security Trust Fund has been diminished. Trustees projected Tuesday, May 12, that the fund will be exhausted by 2037, which is four years earlier than last year’s estimate.
The projection for Medicare had an even more abbreviated life expectancy: The program could be insolvent by 2017, the trustees said.
Some advisors have already included estimates of lesser payouts for Social Security or none at all in their planning analyses.
But for clients without sufficient resources to pay for health insurance in retirement, Medicare is a necessity.
“For medical costs in the future, we have anticipated that Medicare will pay for the bulk of it,” said Chuck Gibson, president of Financial Perspectives of Newark, California, which has $50 million in assets under management.
“We’ve always excluded Social Security from the analysis because I’ve never been a believer that it will be there in full,” Gibson said.
Planning for health care is already a challenge, advisors say.
“If Medicare becomes unreliable, it might force people to delay retirement even longer,” said John Nadworny, certified financial planner with Bay Financial Associates of Waltham, Massachusetts, which has $900 million in assets under management.
Still, no one expects that Social Security or Medicare will completely disappear.
In the future, Social Security will probably be scaled back, Gibson said.
“The government is going to want to give the people who need it the most the full amount,” he said. “Those who have their own assets will probably get less.”
Other advisors agreed.
“It’s politically untenable that any administration would allow Social Security payments to significantly drop even if the government doesn’t have the money,” said Steve Medland, partner at Technical Analysis Based Risk Capital Management of Orange County, California, which has $135 million in assets under management.
But clients who are currently in their 40s and 50s should not expect to receive the full amount, he said.
“We try to account for reduced benefits in the planning estimate,” he said.
The government may also increase the tax base for those on Social Security or delay payments, said Joe Clark, founder of Financial Enhancement Group of Anderson, Indiana, which has $200 million in assets under management.
The dwindling resources probably will not have an impact on current retirees, Gibson said.
“The ones who should be most concerned are the ones who are five to 10 years out from retirement,” he said. “I think they will be looking at insolvency of Social Security or Medicare or both and they will not have had enough time to make a change to their investments.”
Needless to say, the pressure is on to save more money.
Planning for a reduction in Social Security will help clients save more, Medland said.
It’s estimated that Social Security could account for up to 25 percent of what a middle-income individual needs for retirement, Nadworny said. “Its puts more pressure on the middle class to save money.”
The situation underscores the need for younger investors to save in their 401(k) plans, said Scott Toms, chief investment officer at Cornerstone Wealth Management Group of Hagerstown, Maryland, which has $110 million in assets under management.
Some question just how bad it will get.
The estimates may not be accurate as people are prolonging retirement, Clark said.
“You are going to have people paying into the system longer than what the government had originally anticipated,” he said.
Ultimately the government will have to raise taxes to pay for the program, Toms said.