How to Help Your Children Prepare for the Future of Social Security and Medicare
You’ve probably read headlines or heard references to Social Security running out of funds in the coming years. While this may conjure up images of a barrel of money that’s about to run dry, the truth of the matter is more complicated. Social Security is unlikely to disappear completely anytime soon, but experts say it will be unable to fully function in its current state after 2033.
Medicare is facing a similar problem. The Hospital Insurance (HI) Trust Fund, which covers Medicare Part A, is projected to become depleted by 2031. At that point, continuing program income from payroll taxes and the income taxes of some Social Security beneficiaries will only be able to pay 89% of total scheduled benefits.
If you’ve done the math, you’re probably realizing that both Social Security and Medicare may not be able to cover 100% of benefits—benefits you may have been taking for granted—in 10 years or less!
As a self-directed investor, you’ll probably be okay. You’re a creative investor and you’ve learned to roll with the punches. You know you’ll find ways to create more passive income in retirement to cover any loss of income or increased expenses you might face if policymakers don’t enact solutions (and let’s face it—I’m not holding my breath).
While you may admittedly have to work a little harder to shore up your assets and produce more retirement income, your kids and grandkids have decades to strategize for the loss of the two biggest U.S. entitlement programs before they reach their own retirements. And you, as a self-directed investor and experienced wealth-builder, are perfectly poised to help them take action.
Current Social Security Trends
A little backstory is in order here. What we commonly call Social Security consists of two trust funds: the Old-Age and Survivors Insurance (OASI) Trust Fund and the Federal Disability Insurance (DI) Trust Fund. Both are primarily funded through payroll taxes of working Americans. Income taxes paid by some Social Security beneficiaries also go back into the funds. The funds are then invested in federal government securities where they earn interest.
Since 2010, OASI and DI have been paying out more in benefits than they have been receiving in payroll tax contributions. This is due to a few factors:
People are living longer in retirement: When President Roosevelt signed the Social Security Act in 1935, the average life expectancy was 62 years. The average life expectancy is currently 77, so the government has to fund an average of 15 more years of Social Security payments than when the program was originally formed.
The population of retirees is growing: In 1960, there were 5 people in the workforce for every person receiving Social Security payments. In 2009, that ratio was 3:1. In 2030, it’s projected to be just 2.2:1. Fewer workers means less money is collected in payroll tax contributions to support those on Social Security.
Since Social Security’s expenses have exceeded its income, it has done what any of us would do: dip into savings. The OASI and DI trust funds have stockpiled surplus Social Security contributions from prior years, which have kept the program afloat for the last decade. But now, the OASI trust fund—the “savings”—is projected to run out of money in 2033. (The DI is a bit more stable.)
However, OASI and DI still receive annual payroll contributions from working Americans, so even when the trust funds are depleted, Social Security payments won’t vanish overnight. If no legislative changes are made, payroll contributions should be enough to fund 75% of benefits when the trust funds run out in 2035.
Proposed Resolutions to Social Security Shortcomings
The resolution to this shortfall is the subject of much debate. Here are some popular proposals to rectify the Social Security problem.
Raise the retirement age.
Reduce benefits for new retirees.
Lift the ceiling on wages subject to Social Security taxes (currently, everything above $160,200 is not subject to Social Security withholdings).
Reduce benefits for high earners.
Increase payroll taxes.
Change cost-of-living-adjustment (COLA) guidelines.
The most popular of these ideas is to “smash the cap” on wages subject to Social Security taxes. According to the School of Public Policy of the University of Maryland, this concept has widespread support from the majority of Democrats (88%) and Republicans (79%). A current congressional bill proposes something similar, making all earnings above $400,000 subject to Social Security taxes, which would eliminate an estimated 61% of the shortfall.
While there are multiple ideas on the table, exactly how Congress resolves Social Security’s budgetary shortfall remains to be seen. A combination of these proposals will likely be necessary to close the gap completely. And unfortunately, none of these options are particularly attractive to retirees, pre-retirees, or working Americans.
What About Medicare?
Medicare, on the other hand, seems to be in better shape despite recently made comments by some U.S. policymakers. For example, Republican Speaker of the House Kevin McCarthy recently remarked that Medicare and Social Security are going bankrupt.
While the Hospital Insurance (HI) Trust Fund is facing financial difficulties similar to those facing the OASI Trust Fund, the program is not on track to become insolvent and will still be able to cover 89% of total scheduled benefits from payroll tax and income tax revenue.
Even more encouraging, the Supplementary Medical Insurance (SMI) Trust Fund, which funds Medicare Parts B and D, is not on track to become insolvent at any point, according to Senior Fellow Paul N. Van de Water at the Center on Budget and Policy Priorities. In fact, Van de Water states, “The SMI trust fund always has sufficient financing … because the beneficiary premiums and general revenue contributions are specifically set at levels to ensure this is the case.”
However, the fact remains that Medicare Part A—which covers inpatient hospital care, skilled nursing facilities, and lab tests, among other services—is facing financial difficulties. And while Part B and Part D are not at risk of reduced benefits, enrolled beneficiaries are going to continue to see increased premiums. All of this points to the reality that future retirees are going to be responsible for higher healthcare costs in their golden years.
What Does the Future of Social Security and Medicare Mean for Your Kids’ and Grandkids’ Retirement?
Assuming that new policies won’t be enacted in time to prevent these shortcomings from affecting your retirement, there’s only so much you can do to account for the changes to your projected income and expenses.
But for your kids and grandkids, they have more time to plan for these eventualities. The loss or significant reduction of Social Security and Medicare benefits brings up important questions for their futures:
If they won’t receive Social Security benefits—or will receive significantly reduced benefits—how much will they need to save to entirely self-fund their retirement?
If Medicare is no longer available or only covers a fraction of the cost of healthcare services, how much will they need to save for their future healthcare costs?
Is it even feasible for your kids and grandkids to save as much as they’ll need to given their wages and other current living expenses?
Given their realistic future expenses and timeline, what are the most efficient ways for your kids and grandkids to build wealth and produce reliable passive income?
There’s no doubt about it, younger generations have some big mountains to climb when it comes to saving for their futures. But as a self-directed investor, you can teach them about investing strategies that will produce reliable and consistent income for the long term to help them meet these challenges accordingly.
Helping Younger Generations Prepare for a Future Without Social Security or Medicare
The truth is, Social Security was never intended to be the sole source of retirement income, but that doesn’t alter the harsh reality that many retirees rely on it as their primary source of income. For this reason, it’s more likely for the government to address the pending shortfall by making adjustments, such as reducing benefits or delaying the age you can start collecting, rather than phasing out Social Security benefits entirely.
However, with so much uncertainty regarding the future of Social Security benefits, the surefire way to help your kids and grandkids prepare for a secure retirement is to plan as if Social Security won’t be around. Here are some ways you can help your kids and grandkids achieve financial security for a comfortable future.
Teach them about self-directed investing
Encourage them to include income-producing assets in their portfolios
Connect them with the right financial professionals
1. Teach them about self-directed investing
Many investors rarely venture beyond stocks, bonds, mutual funds, or exchange-traded funds (ETFs). But in my opinion, this method of building wealth isn’t going to help the younger generations produce the income they need in retirement. It’s more important than ever that our young people learn about the opportunities inside a self-directed IRA.
You are an invaluable resource to your kids and grandkids as a self-directed investor. By sharing your experiences, insights, pearls of wisdom, and strategies, you can help them smooth the path to successful wealth-building by starting to invest in income-producing assets from a young age.
If you’re struggling to start this conversation or are having trouble getting your younger families engaged, check out the following resources:
How to Talk to Your Kids and Grandkids About Their Financial Future
Multigenerational Wealth: How To Teach Your Kids and Grandkids About Investing
2. Encourage them to include income-producing assets in their portfolios
While appreciating assets are great candidates for building wealth, you and I both know they hardly scratch the surface of investment opportunities. Your kids and grandkids may not yet realize this. If you do nothing else, teach them how income-producing assets generate recurring cash flow for investors and have the potential to increase in value over time.
As they’re accumulating wealth, encourage your adult children to diversify their investments beyond traditional assets like stocks and bonds. A diverse portfolio of appreciating and income-producing assets is crucial to generating enough income for retirement given the challenges they’re facing.
Common income-producing assets that may be attractive to younger generations include dividend-paying stocks and real estate. Dividend stocks can be purchased in accounts such as their employer-sponsored retirement plan, an individual retirement account (IRA), or a taxable brokerage account, giving them an easy entry point to income-producing investments.
Real estate is another income-producing asset they might want to consider including in their portfolio. There are many ways to start investing in real estate, such as purchasing long-term residential rentals, leasing out AirBNB properties, managing self-storage facilities, and so many more. Many Millennials and Gen Zers are building real estate portfolios in addition to working full-time jobs.
If they’re just getting started, they may desire a more hands-off approach to get their feet wet in the world of real estate investing. Real Estate Investment Trusts (REITs) may be a good option to allow them to indirectly invest in real estate by buying publicly traded company shares, which may also pay dividends.
3. Connect them with the right financial professionals
The increased media coverage of the Social Security program in recent years has not only led to a growing concern for the future of benefits, but has taught us that our retirement plans must involve betting on ourselves. For your kids and grandkids, this is especially true.
In addition to yourself, they’ll need a team of trusted financial professionals who truly understand the obstacles they’re facing as they’re accumulating wealth. Before they make significant financial decisions, it’s wise to consult with a trusted professional who can help them understand and navigate complex financial projections for their future to make the best decisions for their unique circumstances.
At a minimum, they’ll need an expert financial advisor, a CPA or other accounting professional, and an estate planning attorney. And if they’re interested in embarking on the path of self-directed investing, they’ll also need a relationship with a self-directed IRA administrator they can trust.
At Chicago Trust Administration Services, we love helping our clients build generational wealth—and more importantly, the skills for wealth-building. We encourage you to invite your kids (or grandkids!) to your next meeting with us so you can deepen the conversation about self-directed investing and set them on a path that will overcome the obstacles of their future.
To schedule your meeting, call us at 312-869-9394 or send an email to steve@ctasira.com.
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*The content and opinions in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
**CTAS professionals are not financial advisors and cannot provide advice or recommendations regarding specific investment decisions.