Proposed Cuts to Social Security and Medicare: What You Need to Know

Last Updated Jul 11, 2011 8:57 AM EDT

I'm tired of reading about all the recent chest-beating by President Obama, Republicans, Democrats, and advocacy groups on both sides of the aisle over proposed cuts to Social Security and Medicare, and their inability to make meaningful compromises. On the other hand, I'm quite interested in practical matters: What do these potential changes mean for our personal planning?

Based on reports about meetings over the weekend that President Obama held with congressional leaders -- and specifically reports of Majority Leader Boehner's desire for a smaller deficit reduction deal -- it looks like we might not see any dramatic changes in the near future to Social Security and Medicare.

Ideas still under consideration are:
  • An extension of the reduction in the Social Security payroll tax, under the guise of tax relief and stimulating the economy. Can't you just hear the can being kicked down the road?
  • Use of a cost-of-living adjustment (COLA) to Social Security income that's based on a chained Consumer Price Index (CPI). This will have the effect of reduced COLA adjustments in the future.
It looks like our leaders don't have much stomach for significant changes to Social Security and Medicare as part of a deficit deal. So any changes to these programs may have to be made as a separate effort to be positioned as strengthening Social Security and Medicare. As if the positioning makes a difference to us! The end result will be the same: a reduction in our future Social Security and Medicare benefits.

Not mentioned so far in this round of talks were:
  • Increases in Social Security's retirement ages. The earliest age at which we can draw benefits is currently 62, with full benefits available at age 66 or 67, depending on your year of birth.
  • An increase in the age at which you're eligible for Medicare (which is currently 65), as proposed in recent months by various lawmakers.
  • More radical suggestions, such as vouchers for Medicare, as recently proposed by Rep. Paul Ryan.
So what does this mean for us ordinary folks? It depends on your circumstances. If you're not yet collecting Social Security or Medicare benefits, then this is what you need to know:
  • There's no need to start your Social Security benefits now to lock them in before they're changed, which is a common misconception these days. If the government adopts the chained CPI for future COLAs, it will apply to all retirees, past and future, and you won't avoid it by retiring now. And if they change the retirement age, that will most likely apply to all people who are younger than a specific cutoff age, such as 55 or 58. None of the recent proposals applied higher retirement ages to people who are currently age 62 or older and eligible to start their Social Security benefits.
  • Don't breathe a sigh of relief, thinking that current benefit levels won't be changed. I think it's inevitable that the retirement ages will eventually be increased and that other benefit reductions may be adopted. Count on retiring in your late 60s or early 70s.
  • Get serious about taking care of your health. It's inevitable that our leaders will find some way to reduce skyrocketing health care costs under Medicare.
  • Get serious about saving for retirement. It's also inevitable that in some way, your future Social Security benefits will be reduced.
  • Think about how you can stay employed longer.
The situation is potentially worse for current recipients of Social Security or Medicare. Use of the chained CPI would be a gradual erosion of the buying power of Social Security income, and that could hit low-income recipients quite hard. And many current recipients can't do much about it -- they can't go back to work or save more to compensate for a benefit reduction.

But that's not the worst possibility. If the government is unable to raise the debt ceiling, its ability to pay current Social Security and Medicare benefits comes into doubt. So far, our leaders say that such an event would be doomsday and won't happen, but when you look at their actions, it seems they're more concerned with posturing and chest-beating than with making any real progress. I'd watch this possibility quite carefully, with backup plans in case your Social Security or Medicare benefits might be temporarily suspended.

These aren't pleasant messages, and I'm not happy about them. But that's the reality we're facing. So I'd rather be as self-sufficient as possible and not be entirely dependent on squabbling politicians and a broke federal government.

Image from iStockphoto contributor Kameleon007
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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.

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