Social Security, Medicare and other earned benefits make up, by far, the largest portion of the federal government's expenses.
They also are among the most misunderstood.
We are starting an occasional series to help you better understand your benefits. We'll answer your specific questions related to Medicare, Medicaid, estate taxes, retirement disbursement accounts, pensions and how government intervention, inaction or overreaction will affect the rest of your life.
Q: Will I receive Social Security benefits?
A: That's a big "It depends." If you're over 65, no sweat. If you're 45-65, you might see some changes from the relatively generous benefits enjoyed by your parents. If you're under 45, you have plenty to worry about.
The problem is more money is being paid out of the system than is going in. The shortfall, now about $200 billion a year, is being made up by drawing on the $2.73 trillion Social Security Trust Fund.
The fund is U.S. government bonds that have been bought by the Social Security Administration for 30 years with money paid by baby boomers. They have spent most of their working lives paying more into the system than it spent.
The extra money was lent to the government, which used it to offset some of the huge deficits of the 1980s and 2000s. (Without the overpayments, the government surplus in the late 1990s wouldn't have happened.)
Now, the retiring boomers are taking out more than younger workers are putting in. According to current estimates, the trust fund could be fully tapped as soon as 2033.
Clare Mallison
Q: So what's going to happen?
A: Time is running out, and the gridlock in Washington isn't helping.
Among possible solutions? Changing the way cost-of-living adjustments are figured, reducing benefits slightly now, but far more over the long haul. Other suggestions range from raising the eligibility age to 70, to reducing benefits for wealthier retirees, to raising taxes.
Count on Social Security, in one form or another, being around for a long, long time. But don't count on it to be as generous as it was in the past.
Q:What can I do about that?
A:Save. Save. And save some more. Social Security was always meant to be a supplement to savings, family support and pensions.
A recent survey from Banker's Life and Casualty found that two-thirds of middle-income wage earners believe Social Security will pay at least half and some as much as 75% of their retirement costs. Some Americans consider Social Security their major income stream during retirement. Bad idea.
Social Security alone isn't going to cover the lifestyles they are accustomed to—not including health-care costs.
Q: Speaking of health care. I understand Medicare is in worse shape than Social Security.
A:You bet it is. The Government Accountability Office estimates the 75-year funding gap will be a staggering $76.4 trillion. The Medicare Security Trust Fund could run dry as soon as 2016, according to a 2011 report from the trustees. And the system is rife with fraud and abuse, costing us nearly $100 billion a year—yes, a year—according to some congressional estimates.
To make matters worse, the government can't seem to get its long-term projections in line. Just last month, the Congressional Budget Office slashed its 10-year budget projection by $143 billion, or 2.2%. It noted that spending was "significantly lower" than projected the last three years, thanks mostly to technology and somewhat to legislation. Is that a trend or a recession-related blip?
By some estimates, we will receive health care that costs three times what we paid into it in our lifetimes. Clearly, that's unsustainable and the only way out is to cut benefits or up the individual ante—neither of which garners much enthusiasm from, well, anyone.
But, like Social Security, some form of Medicare will be around for some time though you can expect that it will be parceled and pared down considerably.
Q:How much does Medicare really cover?
A:Quite a lot, if you stay relatively healthy. Part A, which you get free when you turn 65 (pay close attention to the series of deadlines necessary to sign up), generally covers inpatient services, like medical care at a hospital and during a recovery or short-term care at a nursing home or in your own home. Part B, which isn't free but largely affordable, will pay for outpatient services like doctor visits, lab fees or a wheelchair and other medical equipment when you need it. It also covers preventative services—a big deal.
Medicare will not cover long-term care, in a nursing facility or at home, for those who are disabled or unable to care for themselves.
Part C is called Medicare Advantage and allows you to receive all your medical services through a certain provider, much like a health maintenance organization (HMO) or preferred provider organization (PPO). Part D is a prescription-drug plan.
Medigap is a supplemental policy sold by private insurance companies to help foot the bill for some health-care costs that original Medicare doesn't cover, like copayments, coinsurance and deductibles. Most policies also cover you when you travel outside the U.S. And, these policies can't cut you out if you get very ill or have an existing condition.
If all that's not mind-boggling enough, wait till you see all the deadlines, deductibles and other nuances that go into it.
Write to Jennifer Waters at jennifer.waters@dowjones.com
http://online.wsj.com/article/SB10001424127887323869604578368481493685730.html?goback=%2Egde_84467_member_226230083
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