Social Security Going Bust? That's the Small Problem


Many people are in a near-panic about the woes that Social Security faces. Accused of being a Ponzi scheme, the program is projected to run out of funds by 2036 -- and if it fails, potential consequences could be disastrous. But the other major government program that retirees rely on for their financial well-being faces an even bigger problem -- one that could come sooner than Social Security's demise and lead to more bankruptcy among retirees.

That program, of course, is Medicare, and the funding situation for the portion of its benefits that retirees receive looks even scarier than Social Security's prospects right now.

Medicare's Running Out of Money, Too

With Social Security spending between $40 billion and $50 billion more than it takes in each year, the government needs to find a solution or else see benefits drop to about three-quarters of their current level after the Social Security Trust Fund is gone.

But look at the same statistics for Medicare, and the numbers are even worse.

Based on current trends, Medicare projects its trust fund will run out of money in 2024 -- 12 years before Social Security is expected to run dry. In fact, the remaining asset balance in the Medicare Trust Fund fell below its recommended minimum level earlier this year. Last year, Medicare spent more than $30 billion more than it brought in from taxes and premiums.

The situation isn't irreversible, but the steps for coming up with a fix are very complicated.

Do the Math

If you've ever looked at your paycheck, there's one obvious reason why Medicare is in more trouble than Social Security: Simple mathematics.

During most years, Social Security payroll taxes take out 6.2% from your paycheck, and your employer pays another 6.2% on your behalf. But for Medicare, you and your employer each pay just 1.45%. The big difference is that Social Security taxes only apply to a limited portion of earnings -- for 2012, you'll pay only on your first $110,100 -- while Medicare taxes apply to your entire earnings.

But still, with a tax rate that's less than a quarter of what Social Security charges, Medicare gets a lot less money from workers.

Medicare does, however, have an additional funding source: premiums from its participants. But those premiums, too, fall woefully short of the amount the programs cost -- more than $200 billion short for Part B medical care insurance and Part D prescription drug coverage. That means that unlike Social Security, Medicare already requires big expenditures from the general federal budget on top of its tax and premium revenue.

What This Means for You

Medicare's challenges make it more important than ever to start thinking about how you can cover your ownmedical expenses. Fidelity estimated earlier this year that couples will need $230,000 to pay for health care during retirement -- and that's withcurrent Medicare benefits factored in.

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Fortunately, there are some steps you can take to insure against big bills. Medicare supplemental insurance bridges the gap between the care you need and what Medicare only covers in part. Long-term care insurance covers the cost of nursing homes or other skilled facilities, as well as some home-health care costs.

That protection doesn't come cheap. On long-term care, insurers like Manulife Financial (MFC) and Genworth Financial (GNW) have asked for big premium increases, while MetLife (MET) plans to exit the market entirely. Similarly, Medicare supplements from a wide range of insurers, including Humana (HUM) and WellPoint (WLP), can be costlier than some retirees can afford.

But with the cost of health care rising faster than inflation, insurance can still prove to be cheaper than the potential financial catastrophe of a huge out-of-pocket expense. Unless major reforms to Medicare come in the future, it'll become even more important in the years to come to have a plan to take care of your retirement health-care expenses.

The sooner you start planning for those expenses, the better your own retirement will be. Start by taking these three steps to improve your chances of becoming better off financially, no matter what happens to Medicare and Social Security.

Motley Fool contributor Dan Caplinger hopes for the best but plans for the worst. You can follow him on Twitter here. Motley Fool newsletter services have recommended buying shares of WellPoint.

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