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Are Medicare and Social Security Going Bankrupt?

In this week's Gimme Some Truth, Mitch and Clint discuss an important topic for all our clients. A recent report came out from the government on the status and funding of Social Security and Medicare. The depletion of funds in these programs is accelerating, leading to many of us wondering if we will receive our entitlement benefits (if at all!). We dive in to discuss whether or not the stories that forecast "bankruptcy" are actually true and what can be done about it.

Transcript:

(Note: This is lightly edited and may contain grammatical and other errors)

[00:00:00] This is Gimme Some Truth. This podcast features appearances from Clint Walkner Nate Condon Jonathon Jordan and myself. Mitch DeWitt from Walkner Condon Financial Advisors in Madison Wisconsin. Gimme Some Truth is dedicated to providing an accessible and authentic view into the financial services industry as well as current events and investment concepts that you can apply in your day to day life. Welcome back to Gimme Some Truth. Thank you for joining us today. It is Mitch and Clint together we're going to talk about Social Security and Medicare so I feel like in the news this was one news item that was mentioned this past week and every week it seems like there's so many different news items. There is a G7 summit and all kinds of things going on and in the midst of all this we've got some really important news on Social Security and Medicare and I don't know if you feel the same way but I feel like it was just kind of buried you know it was announced out there and then it just kind of fell off. And it's it's actually a huge story. And that's why we wanted to spend some time on this podcast discussing this with people and kind of making you aware of where we're at and the Social Security and Medicare systems and what it might mean for people in the future. Yeah and it definitely was buried in the news and headlines can come and go so quickly. We have our phones. All these different items are getting pushed to us. And lot of times sometimes these headlines can get buried. [00:01:59][119.8]

[00:02:00] But what happened was the trustees of Social Security and Medicare they come out with an annual report and do kind of a status update of what's going on with Social Security. What's going on with Medicare and the report came out this year basically saying well year over year we found that funds might be depleted quicker than originally anticipated and that's something that might originally cause a lot of people freak out. It's definitely something that needs to be addressed that we can agree on that. Yes for sure. But this is one of those headlines that is very relevant to a lot of our clients and a lot of people out there because how many times Clinton and we sat down with clients that say Oh well I don't know if I want to count on Social Security because you never know what's going to happen there. That's right. Happens all the time probably weekly. We get different thoughts from clients like that. So this is one that's definitely relevant. It's on people's mind and it's something that needs to be addressed. That's right. And the trust funds then. So they say when will the trust fund be depleted. We'll take a step back and say what does that mean. And basically what it means is we've had this trust fund set up where people's payroll taxes and you pay your payroll taxes and part of those payroll taxes go to Social Security. Part of those payroll taxes go to Medicare and if you happen to be a business owner you get the distinct advantage of being able to pay both sides of that because you pay the employer and the employee. [00:03:25][84.8]

[00:03:26] And we do that here at Walkner and it's just wonderful. And so we are paying a significant amount of our paychecks as everyone listen to this podcast in these systems. And so their systems build up these reserves. And what happened was back in the day was so security was really set up to be a very brief program. The age at which you could collect Social Security pretty much matched up exactly with the age that people were expected to pass away. So said another way 50 percent of the people that got to that Social Security age you know we're going to pass away prior to receiving their Social Security and 50 percent we're going to be able to receive some security income in order to supplement those. You know that those old ages. So you know the program was really set up to have this sort of break even point. Well then people started living longer and longer and Social Security really became a integral component to a lot of people's retirement plans. It is today still for just about every one of our clients. I mean it can be two three thousand dollars a month in income that they ended up having to replace. So I mean it's an incredibly important program as is Medicare. And as is Medicaid. And so what we've found out recently is that these trust funds will be depleted a few years sooner and so Mitch you have seen some statistics on that as far as when they're going to be depleted. So what that means is that the funds that have been set aside for future generations will have been exhausted. [00:04:57][91.5]

[00:04:59] It also means that payroll taxes are continued to flow into these programs. So I mean it's not that they will be bankrupt and sometimes you hear that and I think it freaks people out but they won't be bankrupt they're just going to be underfunded now and something's going to be done on the Medicare side. The most recent report says that it could be depleted by 2026. That's not all that far from now. It's about eight years and the year prior the 2017 report. They thought that it was going to be 2029 when the Medicare funds were depleted. So in one year's time when the trustees sit down they do their annual report and status update. Three years have been taken off from 2017 2018 on the security side it is a one year difference so they said in 2017 that it would be depleted by 2035. And the most recent update says one year earlier by 2030 or when those funds would be to be depleted and again to reiterate what Clint said that those are the reserve funds. Right. So that's not taking into account some of the future tax revenues so to speak. That's exactly right. And so you know back in the day because of demographics back in the day we had a significant amount of people paying for you know we might have had six to one just as an example could have been like six to one as far as you know people working versus retirees so people collecting Social Security so that maybe six people paying into the system for every one that was retired. And I think that's the case anymore. [00:06:35][96.1]

[00:06:36] It's below three now and it's trending towards two. So I mean demographically that's why people are utilizing this and so we've got this huge glut of baby boomers in here that are all going to be collecting at similar times and that's that's part of the problem with this is that we have such and they're aging really well. And so from the standpoint of of quote unquote bankrupting the system I mean it hurts because demographically we've got this huge group of people now behind them being the millennials being so large that they are. It will help because those numbers will help reverse themselves. But you know frankly we have to have a bunch of these baby boomers start dying. And then it will correct the whole system right which is really more of it to say you know have a lot of people died earlier. It would really help out the system. Well that's not going to happen. We're going to have people that live longer so you know for Social Security if we speak specifically on that one it says The New York Times article says that tax collections will be sufficient to pay about three fourths of the promised Social Security benefits for 75 years. And so you know there are some things the government can do. [00:07:40][63.7]

[00:07:40] First of all you know we see very little political will to do you know reforming these is called No it's just a situation you don't you don't touch it it's called the what is the third rail of a fourth rail of politics or whatever it is you know you can't touch that because otherwise you get burn up and there's some truth at that that any time that any politician talks about touching Social Security or Medicare benefits like no you're not going to touch it. You know not for me. So you know what are they going to actually do to help you know shore up these programs. I think so security's an easier one to discuss. I mean Michigan you think of anything that they might do to you know increase the life of Social Security while people want to stay away from working longer. Typically that's kind of an unpopular one to say oh I'll work longer and you can get your benefits later. But there definitely needs to be some sort of bipartisan effort. I think right on this right. And and with the 2018 tax law that will be set to expire in 2025. One of the things that we'll probably see when that expires is just an increase in taxes again. So that's something that we definitely anticipate coming up in the future here. Yeah we've talked about how palatal it would be politically. And so it's an inherent part of that tax plan is that the personal tax code expires in 2025 it will revert back to the old rates and so that will likely be a tax increase that we will see. And no one has to vote on that it just occurs. So because it takes no active political will. You know we believe the likelihood is very high that you're going to see you know kind of that reversion back to taxation of the prior 20 prior to 18 will see those tax tables come back into into effect and some of the things they could do to shore up security. [00:09:33][112.4]

[00:09:33] I mean you can change the retirement age. You know now it's 67 which is your full retirement age and they can make it 68 69 70 even beyond that to receive your full benefit and that would make some sense because people are aging better so they'll have probably the ability to take it early. You know they'll allow people to take it early at 62 but they'll start increasing at full retirement age. And that would be pretty political politically palatable especially if they made people that don't vote. For example during the Reagan years they raise the retirement age but they raised it for people that were not even 18 yet. So I mean that makes sense they can't even vote. So for me hey let's make let's make Soyer and Hadlee bear the brunt of that. My kids that are 5 and 2 now will get them with the higher retirement ages not the people that vote. So you know that's I think very likely to occur. The other thing they can do is change the inflation index so they've gone to more of what they called chained CPI and basically this is a way of the government to say OK well let's not give true cost of living increases it's kind of a modified way to do this. And that's another way that you can kind of pick away at it and then you know there might be an increase and I think we're going to see an increase in payroll taxes to help offset that. If they just add in the payroll tax side you're probably seeing an increase. [00:10:59][85.2]

[00:10:59] This is just an estimation we're probably like around 40 percent if they really wanted to shore it up. I've seen numbers here in. Mean that's a significant increase in payroll taxes so you know that wouldn't be as politically palatable so there's going to be a combination of these things to probably shore that up. So the other thing you could do on your own financial plan is OK well you know if the government is telling me that you know they only have enough money to pay out 75 percent of the benefits without doing anything maybe use 75 percent of the benefits in your own financial plan if you want to be super conservative. I've seen that done. Exactly. And that's something that we have to talk with for our clients right. Because there are some that believe we'll find a way. It will be fixed. These funds will find a way to regenerate some some excess reserves there. But there's going to have to be action needed. Right. So it depends on really client by client how much do you believe that this system can be fixed or right the ship versus should we just take a concerted effort and naturally as financial planners we want to play it pretty conservatively right. We don't want to we don't want to go out on a limb say that oh yeah we're going to expect that Social Security is going to maybe you're going to increase your Social Security monthly allowance. Well as players we probably want to take a conservative approach and maybe that point seven five multiple might not be a bad way to approach it. That's exactly right. And also you know Social Security and Medicare make up 40 percent of the federal budget. [00:12:27][87.6]

[00:12:27] So I mean so much focuses on all these different things these entitlement programs and things like that and there are a fraction. I'm not saying they're not important but there are a fraction of the federal budget. And so you know I think that sometimes people miss the forest through the trees just saying hey look you know you've got to look at these things that have an enormous burden on the budget deficit and so security medicare right there. So you know I mean we're going to see something happen with it but it's probably kicking the can down the road a little bit. And then you know I personally believe we're going to see higher taxes. I think we're in a tax trough as a personal opinion of mine and I've shared this with clients who said I might be wrong but I think we're in a tax trough because you know this is the deficits are going to get larger. The tax plan that got signed into law. While there will probably be good for economic growth will probably not be anywhere close to paying for it self. So we're already seeing deficits increase so unless we see some sort of incredible growth numbers and taxes paid it's highly unlikely that the tax code pays for itself. So you know we're going to find some austerity here. You're going to see a kind of an odd situation because you know the Republicans have always been painted as the fiscal conservatives. [00:13:42][74.9]

[00:13:43] The Democrats are likely to run this year and in 2020 on a platform of a bit more austerity it's probably a strategy that is going to capture some votes because people are going to start to see these deficits get rather large. And you know if the Democrats can kind of steal that issue away from the Republicans and paint them more as the spenders I think you're probably going to see that as a politically expedient way to pick up votes and seats. And if we do see a huge blue wave come in 2018 you never know when the tax code could change. It could change. You know it's unlikely that Trump will veto his own tax plan. But you know if you'd see in like 2020 they would they could undo a lot of the legislation in 2020 if the Democrats have the Senate the House and the presidency altogether I think you're going to see that those taxes could change. So you know what do you think that means now Mitch for kind of a recency in the way that she would handle the tax code now in your own personal in our client situations in many cases yeah there's a lot of people that we've talked to to encourage to take advantage of now right. Take advantage of 2018. And I actually myself personally fall into this this group that has done things to take advantage of favorable tax law. And in my case that was converting traditional retirement assets to Roth. Basically I tax them in 2010 tax year. And so my taxes at the end of the year will reflect that when I'm paying my bill in early 2019 for 2018. Tax law. And that's a discussion that we have with a lot of clients says hey this tax law is here for now. [00:15:30][106.8]

[00:15:30] How can we best utilize that for your situation and potentially tax had a lower tax bracket currently and set you up where you have already been tax them sometime in the future. You don't have to worry about that and a retirement asset setting. That's exactly right. I think it's really important now to look at all of your assets and speak with an accountant and work with your financial adviser to be able to determine you know how does my situation kind of how does it get incorporated into this current tax plan. And you know it's interesting that we're talking about taxation and recognizing taxation now when we're talking about the conversation with Medicare and Social Security and the reason what we are is that we see kind of the writing on the wall that hey if this is truly a unique situation then our tax code and a unique point in history because the revenue versus expense numbers in the federal government do not look good going forward. You know it does color what we do now. It's a great time to take stock of where you are personally and if you for some reason have lower income years like you know a spouse is out on maternity leave for UMich. Perfect. Like your income is going to be lower than you know certain things like that where if you have the money on hand in a taxable account or saved up where you can withstand taxation because you don't you really don't want to take out. You don't want to do a conversion and take taxes out of that that's taking six steps back it doesn't make a lot of sense. [00:16:56][85.8]

[00:16:57] But if you've got money on hand to pay those taxes in these tax years and you've got some money saved it can be an incredible thing to do for yourself from a tax perspective making those assets from tax deferred a tax free. Thank you for pointing that out by the way that in my piece but that is good. That's good to point out to the listeners because otherwise it could have potentially taken the wrong way. So make sure you can afford the tax bill is a very important point. Yes. We don't want you to get a tax surprise there. That's why I say I work with the accountant to understand it and fully understand where you're at from a tax perspective and strategies such as this and other strategies can have an impact. How many exemptions you should claim in your paycheck. So you know you've got a number of different things in play here and it's more complex than just OK I'm just going to convert some ACSA assets you know fill out the form and deal with it at the end of the year. I mean that could be a big surprise. And you've got to be really careful about other things too but jumping tax brackets about you know losing some tax credits things like that are you know are your itemized deductions taking a look at that. All of that together in a tax conversation. So I mean there's a lot of nuance to this and that's why you know you've got to be careful and you've got to get with people that you trust to be able to do this and accomplish this. And for those listeners out there maybe pay extra close attention to disclosures at the end of the podcast. [00:18:20][83.1]

[00:18:21] Again we're not CPA is we don't have a CPA on staff and for those of you that maybe click to the next podcast or press staff. We do have disclosures. Yeah. Yeah. Compliance is very important here and walked kind of even though I dreaded to detest the job of being our CEO which means I'm or Chief Compliance Officer so you know someday maybe I'll be able to give that away to somebody like Mitch or something. So we'll see. And the other thing I was thinking about too is is a lot of times people when we have this conversation they think of they're there whether it's a traditional IRA or a rollover IRA or a Roth IRA. That's all part of this discussion but a lot of times people don't realize that they also have Roth options and some employer plans but they're falling OK. And that's another part of the discussion looking at the client's income this year looking at their situation that they're currently in. Do we want to start allocating some of that pretax traditional money and maybe change that allocation on what they're contributing towards their 401k. That's right. If a conversion is off the table then considering the contribution side is incredibly important. Yes just about every 4 1 plan now has a Roth side to it. You do have to ask your employer because it's related to a plan document the employer has you know frankly I think every 4 1 cable and should have a Roth option and if it doesn't you should probably talk to your human resources department and perhaps they can get that added on to a plan document. [00:19:48][86.5]

[00:19:48] It's very easy to do that. And furthermore there is a nuance of the tax code that allows you to convert assets in your existing 401k plan to the Roth side. If the plan document allows it. So you know that's the interesting thing about this. There are laws that allow you to do certain things but then your employer has to write that sort of stuff into the plan document. So you know it's like OK we have a framework and all this stuff is allowable. But do you have the actual pen to paper saying that you can do this inside the plant. So consider that you've got a lot of options on the table there and if you don't know I'm not familiar with what your options are you know again work with your financial adviser work with your financial professional your trusted professional to get you to that point. So you know hopefully this is kind of help to you at least think of Hey take stock of your own assets categorize what the taxation is on those. Take a look at your income. Take a look at the tax tables. You have all those sorts of discussions around you know what is the next seven years look for you and you know how can you shift assets potentially to more tax free sources. Some situations where you may not want to do this is you know if you're really close to retirement and you've got huge income you're making three four or five grand. Into this you know a year and you're a really successful professional. [00:21:06][77.2]

[00:21:06] Well you know you may be stuck in this sort of tax deferral situation versus tax free but if your incomes and I'm going to call it lower in quotes I mean if you're earning under 150 grand a year hey maybe you really want to consider a tax free strategy and that money because of where the tax codes are today. So you know. You know obviously that's a good salary too if you're at fifty. I'm not disparaging that I'm just saying you know let's plan out things and make sure that you're doing what's in your best interest and planning out things and understand that you know we have a philosophy and other people have different philosophies. I mean accountants are always trying to minimize your taxes and this year. Our job is Financial Advisors to give you the most after tax money long term. So you know sometimes we have a different goal an objective in mind with our clients than say an accountant does year by year. But if we can get in the same room with the account and talk through these sorts of things and work as a team I think that's where we're are most effective. And I would argue that that's where the accountant is the most effective to knowing that we're all on the same page and we have the blessing of every party every professional in the room along with the clients and coming down the homestretch of this podcast here. I want to go back to where we started. And we basically came out saying that the funds were so Security and Medicare are going to be depleted. Yes. Pretty bold right. And we came out and said Oh by 2026. [00:22:31][85.1]

[00:22:33] Looks like the Medicare one is going to be depleted and for Social Security it's 2034 and they're depleting at a quicker rate which for those listeners that are in their late 50s and early 60s starting to plan and they're counting on some sort of social security paycheck. I want to make sure that we're transparent about this but also not have them freaked out to the point where they just are going to say oh in two years from now I'm not going to get that paycheck. So that was something I kind of wanted to go back to. And what would you maybe say to those that that might be in their late 50s early 60s that had that thought when they first entered into this podcast. I think there's two things that I would say. I mean number one those programs will not be depleted to the point where they're going insolvent or bankrupt. If you hear that that's more of a political tactic than anything else. And I think it's disingenuous to say that it's bankrupt. It is underfunded much like a pension plan. Many pension plans are underfunded this is underfunded they will find some way shape or form to get them funded at a better level. What people should say realistically is that from a tax perspective they're probably going to be taxed more in the future from a benefit perspective. There's a decent chance that benefits are going to be taxed at a higher rate or curbed slightly to be able to do this and it's probably you know it will be a combination of three or four different things that they end up doing to shore up the programs. [00:23:59][86.1]

[00:24:00] It actually isn't that difficult to shore them up but the political will will come when it's looking the most dire. So I mean they're probably going to kick the can down the road for a while until they have actually have to deal with it. And you know that'll be kind of a scary scarier when you get closer and closer and especially if the years start continue to get lopped off of these numbers where all of a sudden it seems like every year they announced this. You know it gets shorter and shorter. So I don't know. You know obviously the government has an issue with their own numbers. So we should say it will probably be sooner than that even that it ends up you know depleting but you know it will be OK just because it gets depleted does not mean it's insolvent. And I'm thinking that about a year from now we should do an updated podcast. You can take a look at the latest TRUSTe report and I'd be curious to check in on that about a year from now. That'll be fun to see. And probably pretty sobering. So. Well thank you for joining us on this episode as always. We really appreciate your support. We love it when you guys subscribe and give us feedback so please continue to do so and if you guys want a topic or anything send it to us we'd be happy to entertain it and you can listen to more of her musings. Gimme Some Truth. Thank you very much. [00:25:13][73.7]

[00:25:40] Investment advisory services are offered Walkner Condon Financial Advisors LLC registered investment advisor in the state of Wisconsin and Texas Clint Walkner, Nate Condon, Jonathon Jordan and Mitch DeWitt are investment advisor representatives of Walkner Condon. guests on the podcast that registered their participation in a pod cast are limited to unregistered activities and will not be providing any advice that is investment related. Nor should any candidate that guesstimate should be construed as giving investment advice contingent be viewed as an offer to buy or sell any securities mentioned or as legal or tax advice. You should always consult an attorney or tax professional regarding your specific legal or tax situation. Walkner Condon Financial Advisors LLC is not engaged in the practice of law. Whenever you invest you are at risk of loss of principle as the market does fluctuate. Past performance is not indicative of future results practices are said its suitability. This requires a review of investors objective risk tolerance and time horizon. Investing always involves risk and possible loss of capital. Long term care. Estate planning. Insurance products and tax advice are not offered through Walkner Condon financial advisors LLC. Walkner Condon works on a best efforts basis and does not get any results. Past performance does that represent future results. Please see the Walkner Condon website for additional disclosures. [00:25:40][0.0]

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