More Bad News on Social Security and Medicare Trust Funds

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Social SecurityFor years, people have worried about whether Social Security and Medicare would be around when they needed the benefits that those two programs provide. On Monday, worriers got bad news: The programs are closer to running out of money.

The government released the latest versions of the annual Social Security and Medicare Trustees Reports on Monday, and the results were troubling:

  • The combined trust fund that holds funding reserves for the overall Social Security program is now expected to run out of money in 2033 -- three years earlier than trustees expected last year.
  • The news for Medicare is even more dire. Its trust fund will run out of money in 2024 under current projections. That's the same as it was last year, but fully five years earlier than estimates from two years ago.
  • Breaking down Social Security into its component parts, the retirement part of the program will use up its trust fund in 2035. But for its disability program, the news is worse still -- its trust fund will go dry in 2016, two years earlier than last year's prediction.

The reduction in Social Security payroll taxes in 2011 and 2012 has led to steep declines in payroll taxes going to the Social Security trust fund. However, the legislation creating the tax cuts provided for reimbursements to the trust fund for any lost revenue, and it appears that the Trustees Reports treat those reimbursements as money available to the trust fund.

What's Next

As DailyFinance contributor Chuck Saletta has detailed previously, demographics are largely to blame for the current crisis. As baby boomers approach retirement age, there are fewer workers in the younger generations to pay taxes to support their monthly benefits. Unless something's done to address the problem, the trustees expect that Social Security will have to cut benefits by about a quarter across the board when the trust fund assets run out.

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Medicare's problems are even more potentially catastrophic for retirees. Social Security may provide regular income, but Medicare pays a big chunk of the huge unexpected expenses that medical problems bring to many retirees. Any reduction in benefits to Medicare would leave retirees dangerously exposed to financial disaster.

Regardless of what action lawmakers take to address the problem, the Trustees Reports emphasize how important it is for you to have your own retirement nest egg. Counting on Social Security and Medicare for all of your financial needs could be the worst mistake you'll ever make.

For more on retirement issues:

Motley Fool contributor Dan Caplinger wonders if Social Security will still be around when he retires. You can follow him on Twitter.

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