MedicareRetirement

Demographics, There Are Numbers and There Are Numbers.

By January 30, 2017 No Comments

Webster’s Dictionary defines demographics as “the statistical characteristics of human populations (as age or income) used specifically to identify markets.”

In the United States, we often break down the population into generations. The most common generations are the Baby Boomers, Generation X (Xers), Generation Y (Millennilas) and finally Generation Z.

The Pew Research Center and others define the Baby Boomers as those between the years 1946 through 1964.  The Gen Xers were born between 1965 and 1980. The Millennials between the years 1981 through 1997, and finally Gen Z from 1998 and 2014.

The population in America is growing.  This is from births and immigration. However, the problem that few want to address is the fact that the generations have not been growing at consistent rates. The consequences of the inconsistent growth may produce dire consequences.

Per the Centers of Disease and Control (CDC) in its annual National Vital Statistics Reports, the number of births for Baby Boomers totaled 74,887,745. The Gen Xers had 54,910,604 births, and Millennials comprised 65,853,936 births.

As mentioned previously, there has been, thankfully, immigration. For total population growth, it will be argued as a good thing. However, it is not all about numbers of people. A key question to ask is how will this added population through immigration keep up on the wage scale?

Social Security reports that in 2016 there were roughly 45,401,000 million people who were 65 years-old or older and were receiving Social Security benefits.

These Social Security beneficiaries likely includes the generation before the Boomers, who happened to be retired. That should set off the first warning alarm on the proverbial radar screen. Why? The generation before the Boomers, the Silent Generation, are much smaller than the Boomers. What will happen with the silver tsunami of Baby Boomers head into retirement?

Thankfully many Boomers have been earning wages that can help sustain not only the Social Security benefits, but also keep the other entitlement, Medicare, afloat. There are still plenty of Baby Boomers in the workforce. But the question is what happens when the Boomers retire?

For the first time in United States history the generation that is heading into retirement will be not only larger than the generation proceeding it, but much larger. This should set off an even louder warning.

How will the Social Security and Medicare for all those Baby Boomers be paid for? If the Generation X is so much smaller and some have experienced various economic setbacks, there’s a deficit. If we are being told the Boomers will downsize after retiring, who will purchase the homes these Boomers once occupied? If the Boomers cut back on spending in retirement, will the United States economy stay afloat when the cash flow slowly subsides?

If you drill down into how Social Security and Medicare are paid for, the federal government has taken a couple of steps to address the funding issues with Social Security and Medicare. The first is the implementation of the Income Related Monthly Adjusted Amount (IRMAA) through Medicare.

This program adds a surcharge to Medicare Part B and Part D premiums for those retirees who happen to be earning too much income in retirement. At first blush it may not seem like much. However, these surcharges start at roughly 40 percent of the basic premium, and skyrocket to roughly 200 percent of the base premiums. The surcharges will be deducted directly through a retiree’s Social Security benefit, thus helping to reduce the federal government’s obligation of promised Social Security benefits.

Said another way, the government has found a way to reduce the amount of Social Security you paid into. You’ll still owe the portion of taxes on the amount you expected to receive, even though Medicare and its surcharges chewed up more of your benefit. The other caveat is that any surplus from these excess surcharges will be deposited into the fund of the U.S. Treasury that could help ease the deficit.

Pivoting back to the spending mentioned earlier, increasing health costs along with these surcharges through IRMAA may result in many retirees forgoing spending their savings as planned. If income is reduced because of health costs, discretionary spending may reduce as well. That could be a significant hit to the overall U.S. economy.

One more alarm that needs to be addressed is how will the individual states fare with their public employees retiring?  Many states offer their public employees not only a pension based on some formula of their earnings and longevity in ‘the system,’ many will have some form of health coverage as well.

Currently, there is no specific program or health coverage for these retired employees. Once they are Medicare eligible they too enroll for coverage, and any state pension retiree health benefit will coordinate with Medicare. But, they will still be subject to Medicare’s IRMAA surcharges. The very same income that will be used against them, will also be used against the state as well.

As stated previously, we happen to also have the luxury of immigration. But how will they fare in terms of wages?  If the immigrants are mostly unskilled labor, that will not grow wages. There may be a glut of unskilled workers looking for work.

It has been reported that we have seen stagnant wage growth over the last 16 to 17 years, if not longer. This is after factoring in inflation.  There have also been reports that 30 somethings today are making less than their parents did at that age. There hasn’t been much effort to change this course and the call for a national $15/hr. minimum wage may not be the right solution as it could wind up being more money per hour, but less hours worked.

For the federal government to fulfill its Social Security and Medicare obligation and the individual states to fund their public employee pensions and benefits throughout retirement, a larger burden must be placed on the other generations.  How exactly that will occur is anyone’s guess. There are no perfect solutions for those entering retirement shortly, or those already retired.

The real problem just happens to be the fact that future generations aren’t as big as the Baby Boomers. Piling on top of that is many in Generation X may find themselves taking care of elderly parents and their own children. That’s why some call X-ers the sandwich or Oreo generation.

The need to plan accordingly is now. With Medicare defining the income that will be used against retirees to drive up their health costs and lower their Social Security benefit, as “adjusted gross income plus any tax-exempt interest there may be” the choice to defer pay taxes today may not best the choice for many.

Thankfully with Roth Accounts, the 401(h) and Life Insurance there are means to manage the future.

Dan McGrath

Dan McGrath

Mr. McGrath is a Co-Founder of Healthcare Retirement Planner as well as Jester Financial Technologies. He is a best selling author, "What you don't know about retirement will hurt you" and is a nationally recognized speaker on how health costs impact retirement.