There is a lot of conversation in the news lately about Social Security going broke as the Baby Boomers head towards retirement, but, the startlingly reality is that is not.
The logic of Social Security going broke make sense. There is a disproportionate amount of people heading towards retirement, who will be accessing the benefits provided by Social Security while having far fewer people funding the same benefits too.
To complicate matters even further, the trust fund that was created at the onset of Social Security has been depleted over the years by politicians who decided to fund their own pet projects with the money that was deposited in it, instead of letting that money grow.
So, the outlook does appear to be ominous at best especially with too many people taking, not enough people putting in and the government taking whenever possible, but even with all of this happening the rhetoric and the worry may be all for naught and the reason is very simple…your healthcare.
Flying under the radar when it comes to retirement is how the rules have been changed over the course of the last 10 to 12 years and because of these rules, the baby Boomers that are in and heading towards retirement may, to their detriment, actually save Social Security for everyone
else that will follow them.
Unfortunately for them there will also be a large strain placed on their financial plans moving forward and quite possibly a chance that the wealth transfer that is often mentioned will be wiped out as well.
Starting in 1993, under a simple change to the Program Operations Manual System of Social Security it was ruled that in order to receive Social Security a person must also accept Medicare Part A or forfeit all benefits of Social Security.
Meaning that those in and heading to retirement must, once eligible and accepting Social Security, accept Part A of Medicare in order to keep receiving Social Security.
Once Part A is accepted and there is no longer any credible insurance from an employer then a retiree must also enroll into Parts B & D of Medicare or face late enrollment penalties too and, unfortunately, these late enrollment penalties are concurrent, total the length of time late and follow for the entirety of a retiree’s life, by the way.
The other change to retirement that is creating for a windfall for Social Security is the fact that Medicare is also being means tested for Parts B & D. Meaning the more income you earn the more you will pay for this coverage.
This may be the specific reason why, in 2007, the Congressional Budget Office released the below graph detailing the impact that Medicare/Medicaid, Social Security and the Budget would have on the overall US Economy.
See anything in particular; do you see how Social Security levels off after, about 2029, even in the face of the rhetoric that it should open wide like a funnel?
One possible reason to why this 2007 chart from the CBO depicted Social Security as leveling off in the future and not becoming a burden to the economy might just be due to the fact that 2007 was the first year that Medicare was actually means tested.
It could be just some strange coincidence or it could be that the CBO was really trying to tell us something, which just may be:
1) With the implementation of means testing for Medicare and the rules that state how healthcare is to be serviced the actual amount that Social Security will be obligated to pay out in benefits verse what is expected to be paid out in benefits will be different by quite a lot.
2) Because of this means testing the odds of Social Security going broke is low.
With Medicare inflating at 6.5%, at the lowest rate reported by the government, and Social Security’s cost of living adjustments (COLA’s) only expected to be at a maximum of 2.8% annually for the foreseeable future it is only a matter of time and simple math to realize that the government’s obligation of providing Social Security benefits will be lowered drastically, all at the expense of those in and heading to retirement.
On the surface it would appear that the deck is stacked against Social Security, but due to these simple rule changes the end is most likely not as near as the media would like to report it is and judging by what the CBO actually told us back in 2007 the end is probably nowhere in sight too.
But even though the end may be nowhere in sight it still does not mean that you will receive your Social Security benefit anyway or at least the amount of Social Security you have been told you would get.
Because of these health costs and these rules the amount of Social Security benefits that a majority of retirees have and will continue to rely on will, when it comes to actual take home income, either be level for the remainder of retirement, decreasing throughout retirement or even possibly vanishing all together.
The reason, simply put, healthcare, the one thing no one is planning for is inflating at 3 times the rate of any cost of living adjustment given by Social Security and to make matters worse, the Hold Harmless Act will only protect people from Part B increases, not Part D increases so the protection is limited at best.
By the way, for those with high incomes as defined by Medicare, there is no Hold Harmless protection. If Medicare premiums go up by more than your Social Security COLA increase then so be it, your Social Security benefit will decrease.
Those that placed their savings in tax deferred accounts will see the impact when the age of 70.5 rolls around and you have to take your required minimum distribution.
This RMD, unless in a Roth, will be considered income by Medicare and will be used to determine if you have to pay even more for your healthcare. The more of it you have the less Social Security will receive, thus saving Social Security for everyone else.
The time to create another form of guaranteed income, one that is not recognized as income by the IRS and/or Medicare is NOW, because what you don’t know about retirement will hurt you!