The 800-pound Medicare gorilla

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By Linda Norman

“Mister we can use a man like Herbert Hoover again,” shrieks Edith Bunker as she sings about the good old days on the television show All in the Family. Of course, historians will know that Herbert Hoover presided over this country during the early days of the Great Depression. His strong belief that government aid would breed a sense of dependence among the poor made him appear uncaring and ultimately led to his defeat in the 1932 election. Thus, the era of the “New Deal” began with Franklin D. Roosevelt and in November 1936 the first Social Security card was issued.

Let’s fast forward to 2009. While our politicians decide how much “stimulus” to put into the economy, the massive baby boom generation marches into its golden years. And I am concerned about our burgeoning deficit.

Yes, we need jobs now but we can’t totally mortgage the future to do so. The debate regarding the best way to fix our economy rages on but no one is talking about the 800-lb. gorilla in the room. The issue of Medicare in particular should be receiving attention but sadly is not.

Medicare is currently on track to run out of funding just as the boomers will place unprecedented demands on the health care system. This should be at the top of the domestic political agenda right after job creation, in my opinion, and 2019 is a mere 10 years away and unless drastic changes are made Medicare is flat broke.

The Medicare hospital insurance trust fund, which backs the Medicare Part A program, is facing serious financial challenges according to the latest report released by the trustees. Part B and Part D are somewhat better off but costs have been increasing much faster than the rate of inflation.

Here are the sobering facts: Medicare benefits paid in 2007 were $425 billion. This is expected to grow in future years at a pace faster than workers’ earnings or even the economy overall.

If current projections hold true then Medicare will be underfunded by 55 percent in only 5 years. How do we fix this? The trustee’s report suggests two solutions. One is to raise the current 2.9 percent Medicare payroll tax to 6.44 percent immediately. The second solution is to cut the benefits by 51 percent.

Bear in mind this report came out almost one year ago. While the clock is ticking, I have not heard even a whisper from Washington that anyone is trying to find a solution.

While Social Security looks somewhat healthier than Medicare, those statistics are not comforting either. According to the SSA in 2017 the system will begin paying more in benefits than is collected in taxes and by 2041 the fund will be exhausted unless changes are made.

Social Security as it was first conceived was intended to help bridge the gap between pensions, savings and other retirement sources. It was never intended to be the sole source of retirement income, but for most people it is the largest source according to the Social Security Administration (SSA).

It infuriates me that the government has used the Social Security surplus for years to pay its bills. Instead of investing the surplus to pay for future needs of our retirees they have squandered our money and replaced it with IOUs. With so many people counting on Social Security and Medicare I hope that our leaders will find the political courage to come up with a solution but I’m not counting on it.

Meanwhile, what is the legacy that our children will inherit? Is it time to teach them about self-reliance and wean them from the government?

Certainly, Social Security in its current form will not be available to them. How about Medicare? Fuggetaboutit!

At the same time corporations are cutting out defined benefit plans and replacing them with defined contribution plans. This effectively shifts the burden of financing our retirement squarely on our shoulders. Yet, according to the SSA, 31 percent of the workforce has no savings set aside specifically for retirement.

Say what you will about our previous president, at least he tried to tackle the Social Security issue. Apparently his market-based solution was unpopular and he made no headway. Perhaps it was because it meant that we might have to take some responsibility for the outcome.

Note: Any opinions are my own and not necessarily those of RJFS or Raymond James. This article is not meant to be a political commentary, rather a serious look at reality.

Linda Norman is a Certified Financial Planner affiliated with Raymond James Financial Services Inc, member FINRA/SIPC. Formerly located on the 200 Corridor, her office has moved to Deerwood II office complex in Ocala. She can be reached at 629-9138, e-mail Linda.Norman@raymondjames.com or www.raymondjames.com/practicalplanner.