Thursday, July 24, 2014

Social Security is not going broke.

What if  I told you that Social Security is not going broke?  What if  I told you that even with 76 million Baby Boomers and 60 million in Generation X the system is fine?

Naturally you would think I am off my rocker and would recommend that I get my head examined.  Almost everyone who pays attention to the news knows there is a disproportionate amount of people heading towards retirement, who will be accessing the benefits provided by Social Security, and a much smaller population of people funding the same benefits .  The math doesn’t work.  

We also know that there is no Social Security lockbox. The trust fund that was created at the onset of Social Security has been depleted over the years by politicians .  The Washingtonian looters as I call them decided to fund their own pet projects with the money that was supposed to be deposited in the trust fund.  They were supposed let that money grow.  You can make the case that it is the largest Ponzi scheme in history.

What you are not paying attention to, and most academics, financial advisors, pundits, etc. are not either, is the rules for retirement have changed over the last 20 plus years.  Because of these rule changes the Baby Boomers do not realize that they will save Social Security for the generations that will follow them.

Don’t get so excited yet.  These rule changes will affect income in retirement.  It may also significantly reduce or eliminate the premise that the financial industry talks a lot about.  The wealth transfer from the generation to generation.  The money the Generation X folks think they are inheriting from their Boomer parents may not be there.  Oh yeah, the income the Boomers planned for may be much different.

In 1993 there was simple change to the Program Operations Manual System (POMS) of Social Security.  The rule change was in order to receive Social Security a person must also accept Medicare Part A.  If they don’t do that, they will forfeit all of Social Security benefits.

Let me repeat this. If you accept Social Security, you must accept Part A of Medicare at age 65 if you want to keep receiving your Social Security retirement income.  If you are not collecting Social Security at age 65 and are still working, you still must enroll in Part A.  But you can defer taking Medicare Parts B & D if your employer (or your spouse’s) offers credible health insurance.  That means the employer must offer a plan and have 20 or more employees.

Once you accept Part A is accepted and one no longer has any credible insurance from an employer, an individual 65 or older must also enroll into Parts B & D of Medicare.  This is true whether they one is working or retired.  If not, one will face late enrollment penalties too.  These  late enrollment penalties are for the length of time the retiree was late, and they stay with a retiree over his or her life.

With me so far?  Great.  This doesn’t seem so bad.  I mean, you need insurance when you retire and you paid into Medicare while you were working.  Where’s the beef?  Wait for it… it’s now going to get fun. 

The other change to retirement that will actual save Social Security is the fact that Medicare is also being means tested for Parts B & D.  But unlike other means testing where help is given to the less fortunate, means testing for Medicare means the more income you earn the more you will pay for your health coverage (Medicare) in retirement. 

Wait, you never heard of the means testing?  Well this has been going on since 2007 and it comes out of the Medicare Modernization Act of 2003.   Because of this means testing, the federal government can now get a better handle on the actual amount that Social Security will be obligated to pay out in benefits.  Because of this means testing the odds of Social Security going broke is low.

How much longer before the cost of Medicare outpaces the value of  one’s Social Security benefit?  What will it take for people to wake up and realize that the problem they face in retirement is not what financial advisors are promoting, namely Social Security maximization, but rather the cost of their health?

I also want to leave you will a simple math problem.  Thanks to public information from the government, we know Medicare has been inflating at 6.5%.  That’s at the lowest rate reported by the government.  Social Security's cost of living adjustments (COLA’s) are only expected to be at a maximum of 2.8% annually for the foreseeable future.  It was 1.5% in 2014.  How can you have something growing at 6.5% (potentially much higher in the future) being deducted from a pool of money that is growing at a maximum 2.8% ? 

We will drill down further into how the means testing works and what you can do about it in future posts.  The problem is relatively easy to solve, depending on your age. For now I wanted to take the time to tell the back story and provide the information you are most likely not receiving from other professionals.

Robert (Rob) Klein is an independent advisor in White Plains. He’s a leading expert in managing and controlling healthcare expenses in retirement. Rob helps ensure that individuals receive the Social Security retirement income they entitled to receive, while hopefully helping them lower their income tax obligation in retirement.

You may reach Rob at (914) 461-3341 and connect with him on LinkedIn at .  You may also download a free customized report on your health expenses in retirement at

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