The
Coming Medicare Insolvency
The
total federal debt is now over $10 trillion. But if you also include the
current unfunded liabilities of social security, Medicare, and other programs,
the total federal debt is at least $54 trillion. This
number has been confirmed in three separate studies - by the American Enterprise
Institute, the National Center for Policy Analysis, and the Brookings Institution.
It
is difficult to get a grasp of a number that big. That’s $180,000
per person currently living in the United States. It is four times the
U.S. Gross Domestic Product, the measure of the final value of all goods and
services produced in this country in the course of a year.
As
the program is currently structured it is unsustainable, and the fund
is expected to be depleted by 2018. That is a mere 11 years from
now. The shortfall in Social Security and Medicare revenues will continue
to increase as the years go by - it will exceed $2 trillion by 2030. At
that point, half of all tax dollars will have to go to Social Security and Medicare.
That
clearly can't happen. Instead, the system will face massive cuts in benefits,
probably in addition to large tax increases.
Who
Will Pay Your Medical Expenses During Retirement?
So
will Medicare be there for you? It depends on how old you are, but unless
you are retiring in the next couple years, I certainly wouldn't count on it.
Particularly if you want to insure that you have access to high quality medical
care during your retirement years.
Last
year Fidelity Investments reported that the average couple retiring
in 2006 would need $200,000 just to cover medical expenses during retirement.
That estimate did not include the cost of over-the-counter medications, most
dental services and, if needed, long-term care. And it did not include
the charges that are currently paid by Medicare.
If
you cannot depend on Medicare to be there for you, the only smart solution
is to save as much money as possible, so you can obtain the care and the quality
of care you need. If you are not currently putting as much money as possible
aside to pay for these expenses yourself, you are making a serious mistake.
What
Is Your Solution?
As
most readers already know, the very best tool for accumulating funds for future
medical expenses is a health savings account. An HSA is the only investment
that provides a tax deduction when you deposit the money, yet never taxes the
money if it is used to pay for qualified medical expenses.
Therefore,
you should put as much money as possible into your HSA,
and withdraw as little as possible. The contribution limit for 2007 is
$2,850 for an individual, and $5,650 for families. Those over 55 can also
contribute an $800 catch-up contribution. Making the maximum contribution
each year will help you build a medical retirement fund that can be used to
pay future medical expenses, tax-free.
Rather
than withdrawing money from your account to pay for medical expenses as they
occur, you should pay for medical expenses that are not covered by your health
insurance, out of your own pocket. Save your receipts (for doctor visits,
eye glasses, aspirin, etc), and leave your money in the account to grow tax-deferred.
There is no time limit before you have to reimburse yourself, so you can make
the most of this tax-free investment.
As
soon as possible, you may also want to transfer some of the money into mutual
funds. While some HSA
administrators are paying interest rates as high as 5%, the only way you
are going to really grow the account is to get a much higher return on your
money. Many HSA
administrators offer a discount brokerage option, so you can place your
funds in virtually any stock or mutual fund.
For
a family that contributes the maximum contribution each year, it is quite reasonable
to assume an HSA account value well over $1 million after 25 or 30 years.
Medicare may be broke, but at least you won't be.
The
solution to the pending Medicare meltdown is very complicated, but it is clear
that government-run medical programs don't work. The dismal results can
be seen everywhere, from the former soviet-bloc countries, to the broken down
national healthcare systems of Canada and Europe. Medicare must be transformed
into a program where seniors have an ownership interest in the money they are
spending.
Replacing
the government's obligation to provide benefits with a voucher that seniors
could use to purchase health insurance from competing private insurers, and/or
deposit into a "Medicare Health Savings Account", would bring market
efficiencies and competition into the picture. This idea is endorsed by
both the American Medical Association, and the American Hospital Association.
Retirement
Health Savings Accounts
may or may not ever come to fruition. But fortunately, HSA plans are available
to those under age 65. If you do not yet have an HSA, get signed up for
one now. You will lower your health insurance premiums, and can begin
putting money aside for medical expenses you will almost inevitably incur during
your older years.
