Post #5 – What can you expect from Social Security and Medicare? Part I
I originally intended this blog entry to be about estimating the future size of your retirement nest egg and what your subsequent savings rate should be. But this discussion is greatly impacted by your future social security and medicare benefits. The Social Security Administration sends out an annual benefit statement to each person who pays social security taxes. If you have not received this annual statement, you can get a copy of it at this site. Unless you are only a few years away from collecting social security, it would not be prudent to rely on the benefit promised in your social security statement. Because the social security program has accumulated a large future “unfunded liability,” the benefit amount forecasted will likely be higher than what you will actually receive. So before tackling how to estimate the size of your retirement nest egg, it may be a good idea to review the magnitude of the unfunded liabilities for both the medicare and social security programs and discuss any adjustments you should consider making in your retirement planning.
You may have heard about the nation’s debt clock. If not, take a look at this site, USdebtclock.org, to view the real-time US national debt. As of this writing the US Federal government’s total debt is a little more than $14 trillion as shown in the upper left-hand corner of the debt clock. However this $14 trillion debt figure is only the “tip of the iceberg.”
The important figure to look at is the “US Unfunded Liabilities” in the bottom row of the debt clock which now totals over $112 trillion. This unfunded liability figure is for both the social security and medicare programs. It is important to understand how these unfunded liabilities are calculated. The $112 trillion represents the sum of the present value of each program’s estimated annual payouts (I believe the analysis is based on a 75 year period) discounted back to 2011. Another way to look at this figure is the federal government would need to have $112 trillion in the bank today bearing interest at the 30-year treasury bond rate (between 4% to 5% per year) to pay all the promised annual benefits to its citizens for the next 75 years. This unfunded liability represents about 7 or 8 times the USA’s annual GDP of about $14 trillion.
To put the government’s liability in even more stark perspective, look at the figure just above the $112 trillion figure on the debt clock. This $72 trillion represents the current value of all privately held assets by every person and corporation in the country. This means this $112 trillion unfunded liability could not be paid off even if the government confiscated every privately and publicly held company asset, every bond, every checking/savings account, and all real estate held by every person in America. What does this all mean? This means the promised benefits of social security and medicare, as the programs are currently constituted, are not going to be paid.
The only question today is what changes are coming to the social security and medicare programs and how you should plan for them. I will discuss this in my next blog post.
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