Retirement Matters
August 2024
Social Security (SS) and Medicare — Most Michigan Defined Benefit state employee retirees receive a significant portion of their financial resources from SS, Medicare, and a State pension. Make time to learn about how these benefits could change and impact your pocket book.
The aging population and growth in federal health care costs have led to higher spending on SS and Medicare, according to the Congressional Budget Office. If no changes are made to increase funding for SS benefits, the SS combined trust funds are projected to begin reducing benefits by 2034, when the program’s income from taxes will only cover 80 percent of benefits. Likewise, Medicare will only pay scheduled benefits until 2031, according to the latest Medicare trustees’ annual report. At that time, Medicare, which covers nearly 67 million senior citizens and people with disabilities, will only cover 89 percent of total scheduled benefits.
Insolvency — Even though SS benefits have not received direct cuts, these benefits are estimated to become insolvent because the current tax structure isn’t collecting enough to sustain them in the future. According to the most recent SS trustees report, it’s not possible to resolve the shortfall in SS and Medicare by reducing waste alone. There are reasons why no one is hurrying to solve the issue. Tax increases are not usually popular. The deficit is forecasted to occur a decade into the future. And, raising taxes is needed before the retiree gets, what they think, they should be getting already. It reminds us of the Edmund Burke quote that “The only thing necessary for the triumph of evil is for good men to do nothing.” To resolve this issue it requires policymakers to take a leadership role to ensure that fully funding SS and Medicare becomes a top priority.
Payroll Tax for High-Wage Earners — To increase revenue for SS, legislation was introduced in July in the U.S. Congress to eliminate the cap on earnings subject to the SS payroll taxes. Currently, both employees and employers are paying a tax rate of 6.2 percent until reaching the wage-based cap of $168,600. The SS payroll tax is only withheld on earnings up to this limit. Under the proposed legislation, all earnings would be subject to the full 12.4 percent SS tax rate by 2031. This proposal would extend the ability to pay full benefits by an estimated 19 years.
Partial Elimination of Taxation of SS Benefits — Another proposal would further worsen the SS and Medicare deficits. The plan would eliminate the federal income tax on those SS benefits that are currently taxed, depending on your income. The taxation of the SS benefits is projected to raise an estimated $94 billion this year and is used to fund SS and Medicare. According to Budget Watch 2024, without replacement revenue, this would increase SS and Medicare deficits by an estimated $1.6 — $1.8 trillion between fiscal years 2026 and 2035. It advances the insolvency date for SS by over one year and for Medicare by six years. In addition, this reduction in the revenue stream would increase over time and worsen the SS and Medicare’s 75-year actuarial imbalances.
Affordable Care Act (ACA) — You may ask — why is the ACA important to State employee retirees when they are already covered by the Medicare Advantage Plan? The rules included in the ACA protect access to health insurance for people with preexisting conditions, which occur as we age. In addition, many of the caregivers assisting you, when you need long-term care services, will need health care like the ACA to stay healthy. Recently, improvements were made to the ACA to restore consumer assistance, provide outreach financing, and increase premium subsidies, making it more affordable. This led to peak enrollments for Marketplace plans. The next administration will determine if these premium subsidies continue after they expire by 2025 year-end.
Pension Solvency — The State Employee Retirement System’s funding is currently in good shape but other pension plans have issues. According to a July 10, 2024 American Independent Newsletter, 61,000 Michiganders’ pension benefits were protected by the American Rescue Plan (ARP) of 2022. In total, over one million pension recipients were helped in the U.S.
Update Your Social Security Online Account — Recently an e-mail was sent from the Social Security Administration. Millions of retirees, who created an online “my Social Security” account before September 18, 2021, will soon need to switch to a Login.gov account to continue accessing their account. No action is needed if you are already using Login.gov or ID.me.
Editor’s note: Joanne Bump serves as feature columnist for “Retirement Matters.” Column content is time sensitive and is based on information as of 8/11/24. Joanne can be contacted by e-mail at joannebump@gmail.com.
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