Social Security Is Not Going Broke

Ask any financial pundit their thoughts on Social Security and if it will go broke or not. The answer, for the most part, is always the same: “Of course, it will go broke!”

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 too. In the United States, like most developed nations in the world, there are far more people entering retirement than there are people replacing them.

Look at the fertility rates in the U.S. (1.87) and countries like England (1.7), Germany (1.45), Japan (1.41) and even Russia (1.61), they are dropping. In order for any society to maintain itself it must have at least a 2.17 fertility or replacement rate according to Britannica. This may be a driving reason as to why some many countries, including the U.S., have weakened their immigration standards.

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 taking 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 — Medicare.

Flying under the radar when it comes to retirement is how the rules have been changed over the course of the last 15 to 20 years in terms of Medicare and Social Security. Because of these rules those who are in and heading towards retirement may, to their detriment, actually save Social Security for everyone else that will follow them.

The Rules:

1. 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 creditable insurance from an employer, then a retiree must also enroll into Parts B & D of Medicare or face late enrollment penalties too.

2. To complicate matters even more Medicare is also means tested for income through the Income Related Monthly Adjustment Amount (IRMAA). Once enrolled into Medicare the IRS will inform Medicare if a person is earning too much income in a given year. If so then a surcharge is placed on top of that year’s Medicare Part B and D premiums, thus driving up this cost of Medicare, which retirees must have in retirement.

3. Compounding IRMAA further is the fact that what is considered to be income has a broad definition, which is being neglected to be mentioned by every financial firm in the U.S. as well as every accountant/CPA and even employer.

Income is defined as adjusted gross income plus any tax-exempt interest one may have or everything on lines 2a and 8b of the 2019 IRS form 1040.

Some examples are: Social Security benefits, wages, interest, Capital Gains, Dividends and any distribution from any tax-deferred vehicle one may have.

Yes, your Traditional 401(k) and IRA will be used against you in retirement to drive up your Medicare premiums.

On the surface this may not seem like a big deal, but then again those pesky rules the government changed over the years come back into focus and the one that will save Social Security is the 4th one.

4. The bulk of Medicare premiums are deducted directly from any Social Security benefits one may receive.

With Medicare premiums projected to inflate by over 5.5% though the next 8 years and the Social Security cost of living adjustment (COLA) expected to be no higher than 2.7% through the same time period it shouldn’t take a math genius to see what is going to happen.

This could be the reason as to why the Congressional Budget Office (CBO) published the below chart detailing how Medicare/Medicaid, Social Security and the total U.S. Budget will behave over the course of this century.

CBO chart - 2007

CBO chart – 2007

Notice how Medicare/Medicaid continue to rise while Social Security and the Budget flat-line?

The CBO realized that with increasing healthcare costs the U.S. government would not have to payout as much in Social Security each year as Medicare premiums reduce that benefit.

Also, thanks to a change within the Bi-partisan Budget Act of 2015 any monies collected through IRMAA get deposited back into the general fund of the U.S. Treasury through at least 2025.

So, yes, Social Security has some problems when it comes to being solvent in the present, but once federal laws are applied to an aging population plus a financial industry being asleep at the wheel the rules have been changed to ensure its safety.

In fact: Social Security is not going broke.

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