What Younger Generations Need To Know About Social Security, Medicare

Young adults in the U.S. have been skeptical about Social Security at least since the days when I was one of them. Today’s younger generations are no different, and that’s affecting their retirement planning.

About 47% of non-retirees believe Social Security won’t pay them any retirement benefits, according to a 2023 Gallup survey reported in The Wall Street Journal. That number’s been consistent for the 30 or so years that Gallup’s asked the question.

Pessimism is highest among those ages 30 to 49, the prime earning and saving years.

There are good reasons to believe Social Security might not pay younger generations all the retirement benefits currently promised.

The latest estimate from Social Security’s trustees is that the retirement trust fund will run out of money around 2032, and I believe that estimate is optimistic. The Congressional Budget Office has a similar estimate.

But it’s a mistake to believe Social Security won’t pay anything to today’s pre-retirees.

Only a fraction of the money that pays Social Security retirement benefits comes from the trust fund.

Employers, employees, and the self-employed pay taxes that go to Social Security each year. Those taxes are estimated to be sufficient to pay 75% to 80% of promised benefits for 75 years, the longest period the Social Security trustees forecast.

After the election, members of Congress probably will come forward with proposals to change Social Security that they’ve been working on out of the public eye. The probability is they will propose a combination of higher taxes and lower benefits, especially on upper income Americans.

An alternative outcome is Congress will decide Social Security should no longer be self-supporting. Instead, annual deficits would be made up from the federal government’s general revenues. In the last few years, I believe the probability of that happening has increased.

Whatever happens, non-retirees who plan to receive nothing from Social Security will underestimate their retirement income. Most of them are likely to receive 75% or more of the benefits promised as of today, and perhaps more. Those with higher lifetime incomes, however, could receive lower benefits or pay more in taxes.

The misunderstanding about Social Security’s finances is potentially causing younger generations to save too much money and reduce their pre-retirement standards of living.

But while pre-retirees are too pessimistic about Social Security, they ignore at their risk a program that’s at least as important to retirees and I think is in greater financial peril: Medicare.

As I’ve explained in the recent past, Medicare is taking a greater share of the federal budget each year and its path probably is unsustainable.

The Centers for Medicare and Medicaid has taken subtle actions in recent years to reduce the program’s costs.

The policies reduce benefits or cause some medical providers to stop participating in Medicare. Fewer providers is another way of reducing benefits by making care less available.

In coming years, Congress is likely to take a closer look at Medicare. There are members of Congress who favor eliminating Medicare and moving all its beneficiaries into the same insurance system as everyone else.

Even if Congress does nothing about Medicare, premiums the beneficiaries pay are likely to increase faster than general inflation and Social Security benefits.

Some analysts forecast that in a few decades Medicare premiums will absorb most of the Social Security benefits received by many beneficiaries.

Most pre-retirees don’t focus on Medicare’s problems, its limits, or how much they’re likely to have to pay for retirement medical care.

Perhaps it is good that younger generations mistakenly assume they won’t receive anything from Social Security. That causes them to increase savings, which they might need to pay for higher Medicare premiums and other retirement medical costs.