Upcoming Medicare Insolvency Poses Big Challenges for Government, Individuals
Medicare’s assets will be depleted by 2026, the 2019 Medicare Board of Trustees Annual Report states.
In 2018, expenditures for Medicare Part A exceeded income by $1.6 billion, and the Annual Report projects deficits for all future years until the trust fund becomes insolvent in 2026. Growth in Medicare Part A expenditures is projected to reach 7.0 percent for the next five years, compared to an annual expenditure increase of 3.0 percent from 2013 to 2018. The Medicare Part A trust fund “has not met the Trustees’ formal test of short-range financial adequacy since 2003,” the report states.
This year’s report forecasts the same year of projected insolvency as the 2018 Annual Report.
Cutting into Social Security
Related to the issue of Medicare insolvency is the connection between retirees’ Social Security benefits and Medicare. Robert Klein, a retirement health care advisor and policy advisor to The Heartland Institute, which publishes Health Care News, says retirees will have to fund rising Medicare costs out of their Social Security checks.
“Medicare has become a way to save Social Security,” said Klein. “You just won’t get as much Social Security. I think Medicare is wonderful if you follow the rules, but you also have to understand that it’s not free; it’s going to cut into your Social Security check, it’s going to cut into your monthly and therefore annual income, it’s going to take a huge bite out of your retirement.
“In order for it to work as designed, you have to have private insurance,” said Klein. “Original Medicare does not fully cover you.”
Sees Trouble Ahead
The Annual Reportis 243 pages long, with a copious amount of information on the fiscal condition of Medicare. Klein says consumers will have to read between the lines to see how the fiscal limits will impact their wallets.
“Part B must be deducted from Social Security once someone accepts Social Security and enrolls in Medicare,” Said Klein. “Look at the jump as a percentage, not in dollar terms. I suspect Social Security won't have a 6.5 percent or more cost of living allowance (COLA) in 2020 to offset the increase, should Medicare Part B go up to $8.80 a month. A few years ago, Social Security trustees were forecasting a COLA to never be more than 2.8 percent in the near future.
“Those with modified adjusted gross income under $85k or $170K, single or joint [filing, respectively], will be held harmless, and their Social Security check will remain mostly the same,” said Klein. “Those with higher incomes will pay more.”
According to Jane Orient, M.D., executive director of the Association of American Physiciansand a policy advisor to The Heartland Institute, entitlement programs do not have enough workers contributing in order to support the current and upcoming amount of retirees.
“There is no way a retiree can be supported by only two working people,” said Orient. “Nor can the government borrow or print or tax enough to keep the promises.”
Klein says he warns prospective retirees not to count on Medicare.
“The financial services industry is not preparing their clients for this,” said Klein. “Too many see Social Security as the foundation for a financial plan. That's a dangerous plan if you don't factor in Medicare.”
Consequences and Solutions to Medicare Insolvency
The Trustees’ Annual Report says without legislation to address the revenue shortfall, the trust fund assets will cover expenditures only until 2026. To illustrate how serious the deficit is, the Annual Report on page 28 states that to remain solvent during the 75-year period the Trustees use to project solvency, the standard 2.90 percent payroll tax would have to be increased immediately to 3.81 percent. If no changes are made to Medicare by 2026, the required payroll tax increase will have to be 1.02 percentage points. Another potential solution to the lack of Medicare funds is a 19 percent cut in Medicare spending, the report states.
If the government fails to implement a solution to the Medicare funding shortfalls, affected institutions and individuals will have to adjust their behavior and expectations regarding the program. The Trustees’ report recommends “that Congress and the executive branch work together with a sense of urgency to address” the Medicare challenges.
Orient says any solution will have far-reaching consequences.
“Cutting benefits or raising taxes or some combination will significantly affect the economy,” said Orient. “Draining resources from the private, the productive sector, will of course reduce productivity and investment. It always has.”
Orient says there is a way prospective retirees can protect themselves.
“Social Security was never supposed to be enough to support you [fully] in retirement,” said Orient.” People will have to delay retirement, work part-time, or find other sources of income. The last is harder and harder with effectively zero or negative interest rates,” said Orient, referring to the effect on returns for retirement savings accounts and on job creation.
“Everybody who can, needs to decline Medicare and become independent of Social Security income—-increasingly by continuing to work,” said Orient.
Kelsey E. Hackem (email@example.com)writes from Washington.
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