Medicare solvency and its impact on FIRE plans

[Maurice]

As I get more serious about the idea of retiring early, I find myself thinking a lot about the unknowns, and it seems to me that two of the biggest are healthcare expense and the future of taxation. Which brings me to the point of this thread.

Has anyone given much thought to the implications of Medicare's medium- and long-term solvency issues and what the impacts might be on FIRE plans? (of course the same question could be asked about social security but Medicare is a much bigger issue so I'll restrict my topic to that) I find myself thinking about this more and more, especially as I'll need to plan for 40-50 years of retirement under my current plan.

Keep in mind there are two sides of this problem - the future of benefits as well as the future of tax policy - so even if you have lifetime care through another provider this could very much affect you.

Fundamentally, we've made promises that the current funding structure won't allow us to keep. Medicare Part A alone would require today a doubling of the current tax or halving of benefits to guarantee its solvency for 75 more years. Parts B and D are in at least as bad of shape, and are funded through general revenues, not the medicare tax.

I don't mean for this to be a political thread where we argue about who's fault this is or what we think should be done about it. That's an interesting topic, but at the end of the day its totally irrelevant to my point here. The fact is the next 20-40 years will see a big intergenerational battle between retirees and the working/asset owning population and its totally unclear what the outcome of that battle will be.

The possible outcomes include a large increase in taxation, a decrease of benefits, or (more probably) some combination of the two.

Its reasonable to assume that one of the first ways in which benefits would be cut is through means testing - that would likely mean that those of us who have saved enough for early retirement would be excluded from benefits or have them severely curtailed - thus healthcare could be a much bigger expense 25 years from now than we currently are planning for.

The other side of this is taxation - if tax rates were to rise across the board enough to solve all or most of this problem it would likely have a big impact on the ratio of assets to expenses that one needs to comfortably retire.

Has anyone given much thought to this? Not just thinking about it as an interesting political issue but rather how it affects your plan?

 

[OAG]

Means Testing for SS and Medicare Premiums is already here for recipients. Depending on other income, up to 85% of SS is taxed and Medicare Premiums are scaled upward dependent on income listed on your prior tax return. All that has to be done to increase the taxes is to change the current levels of mean testing; which is a simple process to accomplish. About the future my Crystal Ball is a bit foggy since this is one of the things I, as an individual, have no control over so I will just "live with it".

 

[W2R]

Has anyone given much thought to the implications of Medicare's medium- and long-term solvency issues and what the impacts might be on FIRE plans?

Absolutely. I have two years to work before I qualify for lifetime medical, at age 61. I am putting off ER until then. I am pretty healthy, and if all I had to do was wait for medicare at age 65, I might go for it and ER sooner (maybe today? LOL). I suppose it is good that I have to keep working and saving, since consequently I will have more $ than the absolute minimum that I would need in ER.

It is looking more and more like some sort of universal health care program will be established in the U.S., for everyone. That would supplant Medicare but would probably be funded by further taxes (even for those of us who have already had Medicare deductions from our paychecks for decades). So, I am figuring that I might need enough slack in the budget to pay more taxes. It is difficult to know how much this would cost.

 

[Sandy]

Expect to be taxed/means tested more than current beneficiaries.

 

[donheff]

Fundamentally, we've made promises that the current funding structure won't allow us to keep.

That isn't the same thing as promises we can't keep. If the rest of the industrialized world can afford decent health care for all of their citizens, the richest nation on the planet can cover its senior citizens.

The fact is the next 20-40 years will see a big intergenerational battle between retirees and the working/asset owning population and its totally unclear what the outcome of that battle will be.

The possible outcomes include a large increase in taxation, a decrease of benefits, or (more probably) some combination of the two.

This one strikes me as us boomers getting to have our cake and eat it. I have been a proponent of a US single payer health care system since I could think. I was opposed to the Bush tax cuts because they appear to exacerbate the problems with SS and Medicare. But a whole lot of young people making far, far less money than me kept voting this crew into office and cheering on the tax cuts that didn't even buy them a good lunch. Mr. Opponent here, on the other hand, made out like a bandit on the tax cuts - I probably funded an extra year of ER on them. Now, when the reckoning occurs I will be at a much lower tax bracket and will not feel the pain as much as I would have if I had my way seven years ago. All I have to say to the tax cut supporters is, "you made your bed, now lie in it"

 

[tightasadrum]

My "retirement" health insurance cost from megacorp goes up a hefty amount every year. I just received my notice for 2008: going up 23%! And that's pretty typical. The increase is suppose to represent the total increased cost to the plan. Anyone out there getting 23% raises next year? Who is getting this money anyway?

If this represents the actual increase in medical care cost, then we're in for some rough seas ahead. I plan to switch to Medicare at 65, but by then who knows what that will cost me. Yep, means testing is a slam dunk cinch. It's obvious that the system now in place cannot be sustained. I think of the medical industry as somewhat similar to the oil industry's long-term prospects. For oil we're looking at a finite supply that will be more and more expensive until it's all gone. The "oil supply" for health care industry is money, or more to the point, the amount of money people can afford to pay. We're already seeing some of this as more and more people are unable to pay for insurance or health services. We may be seeing an inflection point soon where additional increases only reduce sales dollars to the industry. When that happens, things will have to change.

The problem is there is no renewable energy alternative for health care. If you can pay the bill, you get it; if not, you don't. And even if government ends up nationalizing the industry, we'll still have to pay the bills.

 

[Cb]

I assume that our SSI will be reduced by 20%, and 100% will be taxed (we're 47 & 48)

With respect to Health Insurance:
- I inflate e.healthinsurance.com HSA policy quotes by 50%
- assume that we wind up paying the $5K deductible every year
- and I've budgeted $25K for an excluded knee replacement (another story)

Medicare: I assume that benefits cuts, taxation, and/or means testing to be such that we'll see zero savings at 65 from our previous HC expenses

There's a fair chance Momma will keep working long enough to get retiree health coverage.

Cb

 

[ziggy29]

As I get more serious about the idea of retiring early, I find myself thinking a lot about the unknowns, and it seems to me that two of the biggest are healthcare expense and the future of taxation. Which brings me to the point of this thread.

Yes, those are big ones. I'd add inflation overall as a third, particularly wth energy prices as those affect almost everything else in the supply chain.

Has anyone given much thought to the implications of Medicare's medium- and long-term solvency issues and what the impacts might be on FIRE plans? (of course the same question could be asked about social security but Medicare is a much bigger issue so I'll restrict my topic to that) I find myself thinking about this more and more, especially as I'll need to plan for 40-50 years of retirement under my current plan.

For all the talk about the problems in Social Security, Medicare may be in even worse shape.

Keep in mind there are two sides of this problem - the future of benefits as well as the future of tax policy - so even if you have lifetime care through another provider this could very much affect you.

Right. If you're very close to FIREing (or already have), you might want to see them jack up taxes to prop it up. If you have many years to go, you may want to see a complete overhaul.

I don't mean for this to be a political thread where we argue about who's fault this is or what we think should be done about it. That's an interesting topic, but at the end of the day its totally irrelevant to my point here. The fact is the next 20-40 years will see a big intergenerational battle between retirees and the working/asset owning population and its totally unclear what the outcome of that battle will be.

Frankly, we should have been at this "intergenerational battle" a decade or two ago, but youth is mostly disengaged. If seniors -- and the rate with which they vote and turn out to voice their opinions -- were getting screwed like youth today, it would be all over the news.

The bottom line to me is that it seems like we're in a near-death spiral with respect to demographics and entitlements/benefits -- Social Security, Medicare, pensions, retiree health benefits and the national debt. We keep borrowing more and more so that today's older generation can get what was promised to them, at the expense of their kids and grandkids who will have to pay for it through higher taxes and reduced benefits for themselves. Frankly, if some sort of reform that doesn't share the sacrifice across generations won't arrive soon, then we do risk an all out generational squabble.

The possible outcomes include a large increase in taxation, a decrease of benefits, or (more probably) some combination of the two.

Most likely a combination, yes. As you mention below, means testing might be the first place to start -- but if you means test to sharply, you provide a strong disincentive to save for your own retirement, which is not good public policy.

Its reasonable to assume that one of the first ways in which benefits would be cut is through means testing - that would likely mean that those of us who have saved enough for early retirement would be excluded from benefits or have them severely curtailed - thus healthcare could be a much bigger expense 25 years from now than we currently are planning for.

This has already started to happen with respect to the Medicare premiums being paid. Below $80,000 a year (single) and $160,000 a year (joint) the premiums are currently $93.50 a month, which eventually rises to $161.40 a month. This is not extreme means testing in the least. But it has started and it will continue. It's easy enough to "engineer" lower income in retirement that at some point they may need to start poking into total assets and net worth. The more they do that, the less it pays to be responsible. I accept they may have to do this to some degree, but doing it to an extreme would be a mistake. (Same with Social Security, actually.)

The other side of this is taxation - if tax rates were to rise across the board enough to solve all or most of this problem it would likely have a big impact on the ratio of assets to expenses that one needs to comfortably retire.

Agreed. And from a public policy standpoint, again caution is warranted. The more harshly income is taxed and means-tested out of benefits, and the more they protect and expand benefits for lower-income individuals, the less it pays to LBYM and deprive yourself of "stuff", and indeed, the less it pays to continue working. And frankly, that's probably a mistake when policy puts not working and sitting back collecting benefits at an advantage to working hard and saving for one's own future.

Neither the right nor left have all the answers here, and the sooner we get past the finger pointing and the sooner we get more partisans to stop drinking the Kool-Aid, the sooner we may be able to fix a few things. And the longer we wait, the harsher the "fix" will be.

 

[HFWR]

My retirement HI is predicated on the fact that Medicare will become the primary insurer when I become eligible for same...

 

[FinanceGeek]

Agreed. And from a public policy standpoint, again caution is warranted. The more harshly income is taxed and means-tested out of benefits, and the more they protect and expand benefits for lower-income individuals, the less it pays to LBYM and deprive yourself of "stuff", and indeed, the less it pays to continue working. And frankly, that's probably a mistake when policy puts not working and sitting back collecting benefits at an advantage to working hard and saving for one's own future.

Good points. I expect the labor force participation rate to drop dramatically in the next few years as our government creates huge disincentives to working through higher taxes and "universal" benefits.

The bright side - membership in our board will grow dramatically!

 

[donheff]

My retirement HI is predicated on the fact that Medicare will become the primary insurer when I become eligible for same...

Thats the only way to go. The Federal program (that your Congress critters get) works the same way.

 

[kaudrey]

Hi Maurice,

Yes, these are the big issues. For my retirement projections (I'm 38), I estimate 1/2 of what SS says I'd get. For health care costs, they say the average person spends $215K on medical care on top of Medicare after age 65. My spreadsheet uses $400K from 65 to 95.

Hopefully, by inflating projected expenses and minimizing expected SS income, my projections are conservative and will keep me on target regardless of what happens.