Is Social Security really going broke?

By Dan McGrath

Jester Financial Technologies


The outlook for Social Security does appear to be ominous at best, especially with too many people taking, not enough people putting in, and the government withdrawing money 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: health care.

There is a lot of rhetoric in the news lately about Social Security becoming insolvent as the baby boomers head towards retirement. The logic makes 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.

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 withdrawing money 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: health care.

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 who are in and heading towards retirement may, to their detriment, actually save Social Security for everyone else who 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 and D of Medicare or face late enrollment penalties, too. And, by the way, these late enrollment penalties are concurrent, total the length of time late and unfortunately follow for the entirety of a retiree’s life.
The other change to retirement that is creating a windfall for Social Security is the fact that Medicare is also being means-tested for Parts B and D. This means that 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 (CBO) released the below graph detailing the impact that Medicare/Medicaid, Social Security and the budget would have on the overall U.S. 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 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 — that it is due to the fact that Medicare is being means-tested and that certain Medicare premiums and any surcharges are automatically deducted from any Social Security benefit you may receive.

With Medicare inflating at 6.5 percent, the lowest rate reported by the government, and Social Security's cost of living adjustments (COLAs) only expected to be at a maximum of 2.8 percent annually for the foreseeable future, it is only a matter of time (and simple math) before it's realized 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 on it. And judging by what the CBO actually told us back in 2007, the end of Social Security is probably nowhere in sight.

Please keep in mind that even though Social Security may be fine in the long run, it still doesn't mean that people are going to receive the amount of Social Security they have been told. Because of these health costs and these rules, the 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 stagnant, decreasing or even possibly vanishing all together.

The Hold Harmless Act will only protect people from Part B increases and is null and void for any high-income retirees, as well.

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.