Medicare, Social Security expected to provide less in future

Author: Ellyn Ferguson

Published: January 25, 2004

WASHINGTON - The oldest of the baby boomers - the generation born between 1946 and 1964 - are barreling toward 21st century retirement with few guarantees that Social Security and Medicare will provide much of a financial safety net.

For now, most experts agree that the parents of boomers can rely on the two popular federal programs to provide benefits, including prescription drug coverage starting in 2006.

But boomers can expect changes to Social Security and Medicare that will limit both programs as a record number of Americans turn to them. The retirees of the future already are dealing with changes to workplace pensions as traditional plans with their guaranteed benefits have been largely replaced by 401(k) savings plans, which many workers don?t take advantage of.

Given the uncertainty, many boomers are rethinking when, how and even whether they will retire.

Nearly half plan to work part-time after retiring to keep themselves mentally and physically fit and, in some cases, financially afloat.

"We know that baby boomers do not have the kind of record on savings as the prior generation," said Margaret Neal, director of Portland State University?s Institute on Aging. "I put myself in that group."

Rules change

Pete Mandrapa, a 56-year-old Eugene middle school teacher, is trying to determine when to retire. The state Legislature recently restructured the state Public Employees Retirement System, considered one of the nation?s more generous state pensions, because of state budget problems.

Mandrapa calculates he would get 25 percent less under the new system if he retired in 2005 with 30 years of service. State unions are challenging the change, and Mandrapa hopes the courts throw out the new system.

If the new pension plan survives, Mandrapa will have to decide how many more years he?ll have to work to improve his retirement payments.

"We were all thinking we could retire at a certain age," Mandrapa said. "The rules are changing on us. How can you plan your future?"

Mandrapa?s question is one many boomers are asking.

Suzan Turley, a 61-year-old retired state worker, has this advice: Read, consult experts, cut expenses and cross your fingers.

Five years before she retired, Turley took a hard look at her finances. She attended pre-retirement workshops, picked an experienced financial retirement planner and took a class at Portland Community College to find out what emotional and financial adjustments retirement would bring.

Thanks to one of those workshops, Turley learned she could collect Social Security survivor benefits on her second husband when she turned 60. Those benefits enabled Turley to retire from her full-time job in January 2003 before the state pension system changed.

"It made the difference between I could do what I wanted to do and being forced into something (working another three to four years) that I did not want to do," Turley said.

But Turley is still nervous.

"I?m hoping my finances will cover retirement," Turley said. "I?m actually considering finding part-time work at the beginning of the year to supplement my savings."

Checks could shrink

The first big wave of boomers will hit age 65 in 2011.

Medicare, which provides health insurance for 35 million elderly and 6 million disabled people, is expected to remain financially solvent until 2030 if no changes are made. Social Security, which provides monthly checks to retirees, is expected to stay solvent until 2041, according to the most recent projections by the program?s trustees.

Experts don?t expect either program to collapse even though the number of retirees drawing benefits will increase as the number of workers who pay taxes to fund the programs declines.

Last year, 35.6 million people or 12 percent of the U.S. population was 65 and older. By 2030, 71.5 million or 20 percent of the population will be 65 and older. Twenty-four percent of Oregonians will be 65 or older.

While the programs will keep going, Social Security checks might shrink and health insurance benefits offered by Medicare might be limited to control costs. The payroll taxes that support both could increase.

Congress already has started fine-tuning Social Security to slow the flow of money out of the trust fund. People who turn 62 in 2022 will have to wait until they turn 67 to collect full benefits. That?s up from the current age 65. That means those who retire before age 67 will have to find other sources of income because Social Security checks will be a smaller share of the average retiree?s income.

C. Eugene Steuerle, a scholar with the Urban Institute?s Retirement Project, said the federal government is making the changes to stretch federal dollars spent on retirees.

"The public sector has made promises it can?t keep," he said. "The average couple who retires is promised $600,000 in (Social Security and M edicare) benefits over their lifetime. For those who retire in 2030, the government is promising $1 million to couples."

Congress may act

It?s possible Congress will make more changes to control costs.

For example, there was speculation in December the Bush administration would revive proposals to create personal retirement accounts similar to private 401(k) plans. The goal is to shift the burden of meeting retirement needs from the federal government to individuals.

In December, Congress approved a new Medicare prescription benefit with premiums that will be based on beneficiaries? incomes. This is the first time in Medicare?s history that premiums have been tied to income. Many believe it could be a prelude to widespread use of income in determining retiree costs for various government services.

The traditional advice to people planning their retirement is not to rely on Social Security checks for the bulk of their income. Why?

Today, a person who earned less than $35,000 a year and decided to apply for Social Security benefits at age 62 would draw an estimated $8,880 a year or $740 a month in payments. If a 65-year-old person in the same income category waited until this year to receive Social Security payments, the yearly benefit would be $11,376 or $948 per month.

People who earned more get more in Social Security benefits. A 62-year-old retiree who averaged about $57,000 in yearly earnings could get approximately $12,660 a year, or $1,018 a month. An older colleague who waited until after a 65th birthday this year to draw benefits could get nearly $15,948 a year or $1,329 a month.

That?s why for years, financial counselors have advised people to consider the federal program to be just one leg of a three-legged stool upon which they build a retirement plan. The other two legs are personal savings and retirement pay.

The rule-of-thumb is that people need 65 percent to 80 percent of their working income to live comfortably. Anyone preparing for retirement in the 21st century must devise a financial strategy to last 10 to 30 years of life.

"The average person now retires at 62 or 63 with one-third of their adult lives ahead of them," Steurele said. "We?ve sort of kidded ourselves that we could keep adding years to retirement" without adding costs.

But Steuerle said early retirement puts many people at risk.

"For a typical retiree often how well off they are at 62 is different from how well off they are at 85," he said.

As a result, Steuerle predicts more people will want to or need to work beyond retirement age to delay dipping into their savings.

Age a key factor

At this point, however, there are more disincentives than incentives for employers to let people work past age 65.

In a July report, Steuerle and two colleagues found that employee compensation plans are designed to move out older, expensive workers and replace them with younger, less expensive workers. Employers, even in fields like nursing where retirements will exacerbate existing worker shortages, are hesitant to change policies to accommodate older workers for fear of running afoul of age discrimination laws and federal employment laws.

Alicia Munnell of Boston University?s Center for Retirement Research agrees with many of the findings.

Munnell has done research on how people plan for retirement. Her latest study and forthcoming book looks at employers? replacement of traditional pension plans with 401(k) plans, which require workers and sometimes their employers to put money into investment accounts.

While a pension provides a specific amount for retirement based on years of service, the amount of money an individual takes into retirement from a 401(k) rises and falls with the stock or bond market.

Munnell found that only 25 percent of eligible workers participate in their 401(k) and only 10 percent of those who do participate contribute the maximum.

Munnell believes one way to make sure more people have a retirement safety net is for companies to automatically include all their workers in their 401(k) plans and automatically set contribution levels. Workers would have the choice of dropping out of a plan or changing contribution levels.

"You retain your choice except they are starting you in a place where people who care about this think you should be," Munnell said.

She also advocates greater education on financial basics to help the average person make better decisions, although not everyone can become a financial whiz.

"I?m not great about this," said Munnell, 60. "And I have a Ph.D."

Active retirements

Results of AARP survey in 2003 on working retirements:

63 percent of people ages 50 to 70 now working plan to work at some point after they retire.

Money was the top reason for working.

5 percent of those surveyed plan to never retire.

66 percent of people who lost money in the stock market during the recession postponed retirement.

Social Security Administration?s estimate of how much of a retiree?s income will be provided by Social Security in 2030

Low-wage earners, 49.1 percent - down from the current 55 percent.

Middle-income earners, 36.5 percent - down from the current 41.2 percent.

High-income earners, 24 percent - down from the current 27.3 percent.