Social Security and Medicare
Social Security and Medicare are an essential part of anyone’s financial life. Let’s spend a little time discussing the importance of Social Security and Medicare on your financial future.
Will Social Security and Medicare be there when I need them?
Let me begin by saying that I cannot answer the question of whether Social Security and Medicare will be there when you need them, regardless of whether you are 8 or 80. I sometimes wonder if anyone knows. We’ll get into that in a bit, but let’s discuss the question that is on everyone’s mind about Social Security and Medicare.
If you are over the age of 62 and retired, receiving Social Security income, you likely appreciate the monthly check you receive, deposited directly into your bank account, just like clockwork. If you are younger, you may worry that Social Security may not be there when you need it. If you are starting out in the workforce or even younger, you may be saying, “What is Social Security?”
Likewise, if you are over 65, you are aware of the value of Medicare insurance in helping you pay for your medical needs. Now, there is an entire discussion surrounding retiree medical insurance that I’m not going to get into because it’s beyond the scope of what I’m trying to do here. Suffice it to say that I strongly suggest professional help as you near retirement to navigate the pros and cons of Medicare vs. Medicare Advantage, Medicare Supplements, and all the alphabet programs, such as Parts A, B, C, D, F, G, etc., etc. If you are exceptionally fortunate, you may even have retiree medical insurance provided by your employer; however, this is rare in today’s world. I cannot overstate the importance of being educated on your choices. Well in advance of when you need them. Some healthcare choices can be changed periodically, but others are one-time only, and timing is crucial. Yes, it’s that important. As much as I thought I knew about all of this, I sought professional help, and I’m glad I did, as I was quite a bit more ignorant than I thought I was regarding medical insurance in retirement.
Some folks have other retirement income and medical benefits that are provided by the military, various government agencies, unions, etc., etc. that are in addition to, or in place of, SSA and Medicare. I can’t get into all the various programs, but for the sake of discussion, it’s safe to say that you really need to know what sources of income and medical benefits you will have in retirement so you can determine an appropriate financial plan. Knowing and understanding these issues early in your career will help you later. Sadly, some people wait to learn about these benefits until they need them. They are sometimes unpleasantly surprised at that moment when it is too late to do anything about it. Please don’t let that be you.
Let’s dig in a bit and discuss the importance of Social Security and Medicare on your financial future.
A brief history of Social Security and Medicare
Social Security was established on August 14, 1935 when President Franklin Roosevelt signed the Social Security Act as a foundation of income for workers retirement and, later in 1939, added benefits as a social insurance protection for those who become disabled and to families when the primary income recipient dies (Notes 1, 2). Medicare, a form of medical insurance for retirees, was established in 1965. Together, Social Security and Medicare provide the basis of retiree income and medical insurance for most people. Beginning in 1975, annual Cost-of-Living Adjustments, or COLA, were added to compensate for inflation and other increases in costs over time.
Originally, SSA and Medicare were designed to begin being paid at age 65. See the link in Note 3 if you would like to learn more about how this age was selected. Tax rates and the amount of earnings have also changed over time (Note 2). Medicare still becomes effective at age 65, but Social Security payments can begin as early as 62, although there are reduced benefits from what is called the normal retirement age which is almost 67 years old now. Suffice it to say you have choices but those choices come with pros and cons.
Social security is primarily funded by withholdings of income. This rate is currently 6.2% of an employee’s earnings and is matched by the employer for a total withholding of 12.4%. Medicare is funded by a withholding of 1.45% by the employee, matched by the employer for a total of 2.9% (Note 4). The figures are a bit different if you are self-employed. If you are self-employed, you already know that you pay more than those working for a typical employer.
Will Social Security and Medicare run out of money?
There are concerns that SSA and Medicare will run out of money in 2033 and 2036, respectively, causing alarm among current and future recipients (Note 5). The article in Note 5 contains beneficial information on the causes and some proposed fixes to improve the system. For an shocking graphic that shows, what in my opinion is the most significant cause of the problem (low returns on the money we each provide to SSA), click on the link in Note 6 and study the graph closely. There have been various calls to privatize Social Security and even some countries have used this method. I won’t get into it here, but after you look at the graph, you decide if you think what we are doing is adequate. Hint: it’s not.
When should I start taking SSA and Medicare?
The answers to these questions are as varied as the people themselves. You’ve heard me discuss the value of a three- or four-legged income stool in retirement, with Social Security (SSA) being one leg, a pension potentially serving as a second leg, retirement savings (401(k), etc.) as a third leg, and any passive income on taxable income as a potential fourth leg. This is where the value of a professional financial advisor comes in, and you should establish that relationship early in your career.
Why is it important to start planning early?
I’ve tried to lay out the case that financial planning is a lifetime plan and there is no such thing as starting too early. Knowing what SSA and Medicare benefits are projected to be is the basis of almost everyone’s financial life (excluding the uber wealthy who don’t need SSA or Medicare) in retirement, and likely will be used in planning individual savings and investment plans. There is one more hugely important factor to consider: Many people are not able to retire when they originally plan to. This can be due to health issues, layoff or being fired before one is ready to retire. It's best to start planning early so that your plans can account for any of these unfortunate events.
The bottom line
For some people, Social Security Administration (SSA) and Medicare, government-provided programs, are their only source of benefits in retirement. SSA was never designed to be a sole source of retirement income, but unfortunately, some folks did not plan well, and this is the case. Living like this does not make for an enjoyable retirement, but rather one of subsistence.
If you start your financial planning early, as I advocate, SSA and Medicare can provide a solid foundation for planning your other financial strategies. This is the takeaway from this post: Start early and incorporate anticipated SSA and Medicare benefits into your overall financial plan.
The amount of SSA benefits you receive is based on your lifetime income and typically uses a formula that considers your average indexed monthly earnings (AIME), which is calculated from your highest 35 years of earnings. Medicare premiums are generally based on your Modified Adjusted Gross Income (MAGI) for the prior two years and can vary substantially among individuals and may even change annually. There are legal strategies that can help you minimize your costs. Again, professionals can help you with this. I often say that taxes and medical issues, to include medical insurance are often significant expenses and often come as a surprise to those who have not carefully planned. Please don’t let that happen to you.
A Dirty Little Secret
I want to bring to your attention something that may affect you or someone you know. If you work a legitimate job for a legitimate employer, they are required to make Social Security and Medicare withholdings and contributions on your behalf. This is one advantage of signing up at ssa.gov; you can monitor your withholdings and projected retirement income on the site proactively as the years go by.
On the other hand, certain people perhaps work in a manner where their income is not, how shall I say, quite on the up and up. Perhaps they are self-employed and work for cash, or do not fully report their earnings. These earnings are not properly taxed, nor are the appropriate deductions for Social Security (SSA) and Medicare taken out of their income. Besides the obvious legal and moral problems with this method of living one’s life, the real payback is in reduced benefits in retirement, as I described in the preceding paragraphs. I won’t opine further on this, but I think we all understand what it means. That’s all for this week!
What’s in it for Me
Educating yourself on SSA and Medicare benefits you will receive when you are older is just plain common sense. Or should be. Understanding that early in your career will either give you comfort or prompt you to take the necessary action to compensate. Educate yourself. Begin today.
Call to Action
If you have not signed up with Social Security to monitor your projected benefits and to use their planning tool, do that today at ssa.gov. It always surprises me how few people are aware of this.
Recommended Resources
ssa.gov has a lot of helpful information regarding Social Security benefits, and you can even see your personal results based on your income.
Up Next
How much do I need to retire, or what’s my number part 2.
Notes
Please note that as an Amazon Affiliate, I may earn a small commission on the sale of any of these recommended resources.
Center on Budget and Policy Priorities: https://www.cbpp.org/research/social-security/top-ten-facts-about-social-security#:~:text=Social%20Security%20provides%20a%20foundation,to%20families%20whose%20breadwinner%20dies.&text=Eighty%2Deight%20years%20after%20President,%2C%20effective%2C%20and%20popular%20programs.
irs.gov: https://www.irs.gov/taxtopics/tc751
Kiplinger: https://www.kiplinger.com/retirement/social-security-and-medicare-funding-is-the-sky-falling
MarketWatch: https://www.marketwatch.com/story/at-last-somebody-is-trying-to-save-social-security-c8daaffe