What Younger Generations Need to Know About Social Security and Medicare

Young adults in the United States have been skeptical about Social Security at least since the days when I was one of them. Today’s younger generations are no different, and that’s affecting their retirement planning.

About 47% of non-retirees believe Social Security won’t pay them any retirement benefits, according to a 2023 Gallup survey reported in The Wall Street Journal. That number’s been consistent for the 30 or so years that Gallup has asked the question.

Pessimism is highest among those ages 30 to 49, the prime earning and saving years.

There are good reasons to believe Social Security might not pay younger generations all the retirement benefits currently promised.

The latest estimate from Social Security’s trustees is that the retirement trust fund will run out of money around 2032, and I believe that estimate is optimistic. The Congressional Budget Office has a similar estimate.

But it’s a mistake to believe Social Security won’t pay today’s pre-retirees anything.

The trust fund pays only a fraction of Social Security retirement benefits.

Employers, employees and the self-employed pay taxes that go to Social Security each year. Those taxes are estimated to be sufficient to pay 75% to 80% of promised benefits for 75 years, the longest period the Social Security trustees forecast.

After the election, members of Congress probably will come forward with proposals to change Social Security that they’ve been working on out of the public eye. The probability is they will propose a combination of higher taxes and lower benefits, especially on upper income Americans.

An alternative is that Congress will decide Social Security should no longer be self-supporting. Instead, annual deficits would be made up from the federal government’s general revenues. In the last few years, I think the probability of that happening has increased.

Whatever happens, non-retirees who plan to receive nothing from Social Security will underestimate their retirement income, potentially causing them to save too much money and reduce their pre-retirement standards of living.

But while pre-retirees are too pessimistic about Social Security, they ignore at their risk a program that’s more important to retirees and I think is in greater financial peril: Medicare.

As I’ve explained in the recent past, Medicare is taking a greater share of the federal budget each year and its path probably is unsustainable.

The Centers for Medicare and Medicaid has taken subtle actions in recent years to reduce the program’s costs.

The policies reduce benefits or cause some medical providers to stop participating in Medicare. The reduced availability of providers is another way of curbing benefits by making care less accessible.

In the coming years, Congress is likely to take a closer look at Medicare. There are members of Congress who favor eliminating Medicare and moving all its beneficiaries into the same insurance system as everyone else.

Even if Congress does nothing about Medicare, premiums the beneficiaries pay are likely to increase faster than general inflation and Social Security benefits. Some analysts forecast that in a few decades Medicare premiums will absorb most of the Social Security benefits received by the bulk of beneficiaries.

Most pre-retirees don’t focus on Medicare’s problems, its limits or how much they’re likely to have to pay for retirement medical care.

Perhaps it is good that younger generations mistakenly assume they won’t receive anything from Social Security. That causes them to increase savings, which they’ll be able to use to pay for Medicare premiums and other retirement medical costs.

Guaranteed Lifetime Income Increases Retiree Spending

Retirees with more guaranteed lifetime income spend more in retirement and do so without worrying about running out of money.

The additional spending is meaningful, according to researchers David Blanchett and Michael Finke, who recently updated research they produced in 2021.

Retirees with Social Security, pensions and annuities spend about twice as much as retirees who have the same amount of savings positioned in the investment markets.

The researchers found that most people think differently about guaranteed income than they do about money in savings and investments. About 60% of retirees surveyed said they’re more comfortable spending on nonessentials when the spending comes out of regular income instead of savings and investments.

People know the guaranteed income will be replaced in the next month, and they don’t have to worry about changes in the markets or interest rates affecting their ability to spend.

When retirement savings are in investments, no one can be sure how long the money will last and how much can be safely spent each year. Market movements, inflation, interest rates, longevity and other factors influence how long the money lasts and how much money is available to spend. People are less confident when there’s so much uncertainty, so they spend less.

There are two ways most retirees can increase their guaranteed income and therefore their spending safely.

One way is to delay claiming Social Security retirement benefits. The other way is to increase the amount of retirement savings used to buy annuities with guaranteed lifetime income.

A couple of caveats are that one of the researchers works for an issuer of annuities and the new study was published by an annuities industry group, the Retirement Income Institute of the Alliance for Lifetime Income.

Donor-Advised Funds Give More in 2024

Donor-advised funds (DAFs) contributed 31% more to charities in fiscal year 2024 than in 2023, according to data from DAFgiving360 (formerly Schwab Charitable). The data covers only DAFs associated with DAFgiving360.

Total donations in 2024 were $6.6 billion, about $1.5 billion more than in 2023. Almost 141,000 charities received more than one million grants through the DAFs.

In 2024, 70% of donors contributed to organizations they hadn’t supported in previous years. On average, donors recommended donations 13 times during the year. Automated, recurring gifts were about 35% of total giving by the DAFs.

Charities generally were able to use the money as they wished, because 72% of the donations were unrestricted gifts.

DAFs are an increasingly popular way to make charitable gifts. They allow donors to bunch gifts in one year, increasing the potential tax benefits.

DAFs also allow a donor to set aside money now and decide thoughtfully over time who the final recipients will be. Meanwhile, the money is invested and the amount available to give increases.

Using a DAF also makes it easier for many people to convert appreciated assets into charitable gifts.

For more about DAFs, see the July 2023 and January 2024 issues of Retirement Watch.

The Data

The Consumer Sentiment Index from the University of Michigan was 66.4 at the end of July, falling from 68.2 at the end of June but rising a little from 66.0 in mid-July.

Expectations for the future improved in July, but assessments of current conditions declined.

The Personal Consumption Expenditure (PCE) Price Index was up 0.1% through June and 0.0% in May. Through 12 months, the PCE Price Index was up 2.5% through June and 2.6% through May.

The core PCE Price index, which excludes food and energy prices, increased 0.2% in June and 0.1% in May. Over 12 months, the core PCE Price Index rose 2.6% through both June and May.

Personal income increased 0.2% in June following a 0.4% increase in May. Compensation growth slowed, gaining 0.3% in June after rising 0.6% in May.

Personal spending increased 0.3% in June and 0.4% in May. In June, spending rose on both goods and services, though the jump in spending for services was much higher than for goods.

The Conference Board’s Consumer Confidence Index increased to 100.3 in July from 97.8 in June (which was revised down from the original number). The index in July was in the lower portion of the narrow range it has been in for about two years.

Consumers’ assessments of their present situations declined from June to July. But expectations for the next six months improved. Even so, the Expectations Index was below 80, which historically preceded recessions.

The number of private sector jobs created in July declined to 122,000 from 155,000 in June, according to the ADP Employment Report.

The report found that job-switchers increased their annual compensation by 7.2% in July, down from 7.7% in June. The annual compensation boost for those who stayed in their jobs was 4.8% in July, the lowest level in three years.

The number of job openings dipped a little in June to 8.184 million from an upwardly revised 8.23 million in May, according to the JOLTS (Job Openings and Labor Turnover Survey) report.

A year ago, the number of job openings was 9.12 million. The monthly average from 2021 to 2023 was 10.174 million.

The number of workers voluntarily quitting jobs in June was 3.282 million, the lowest number since November 2020 and less than the 3.403 million estimated for May.

Compensation increased 0.9% in the second quarter, down from 1.2% in the first quarter, according to the Employment Cost Compensation Index.

Wages and salaries increased 0.9% in the second quarter (1.1% in the first quarter) while benefits climbed 1.0% in the second quarter after rising 1.1% in the first quarter.

Durable goods orders tumbled 6.6% in June after rising modestly for four consecutive months.

But most of the decline was from a 20.5% drop in transportation orders. After excluding transportation, orders increased 0.5% in June following a 0.1% fall in May.

Durable goods orders — excluding both transportation and defense orders — are considered a good proxy of business investment, increasing 1% in June, after falling 0.9% in May.

The Kansas City Fed Manufacturing Index declined to negative 12 in July from negative 11 in June. That’s the fifth consecutive month the index has been negative. In the last 12 months, the Kansas City Fed Manufacturing Index has been positive only in August 2023 and February 2024.

Home prices increased 1% in May and 1.4% in April, according to the S&P Corelogic Case-Shiller Home Price Index.

Over 12 months, the index increased 6.8% through May and 7.3% through April.

The index’s last month decline was in June 2023. It has had monthly increases of 4% or higher each month since September 2023.

The House Price Index from FHFA was unchanged in May after rising 0.3% in April.

Over 12 months, the index increased 5.7% through May and 6.5% through April.

Pending home sales rose 4.8% in June after declining 1.90% in May. June’s pending home sales were 2.6% lower than the same month 12 months earlier.

Gross domestic product (GDP) increased at an annualized rate of 2.8% in the second quarter, according to the first estimate, up from a 1.4% annualized increase in the first quarter.

Consumer spending on goods increased at a 2.3% rate in the second quarter versus 1.5% in the first quarter. Spending on services rose at only a 2.2% rate in the second quarter, down from 3.3% in the first quarter.

New unemployment claims declined by 10,000 to 235,000 in the latest week.

Continuing claims, which lag a week behind new claims, decreased to 1.851 million from 1.860 million. The latest reading is the third-highest level in the last 12 months.

The Markets

The S&P 500 lost 2.13% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 0.97%. The Russell 2000 fell 0.03%. The All-Country World Index (excluding U.S. stocks) declined 1.00%. Emerging market equities retreated 1.62%.

Long-term treasuries gained 1.44% for the week. Investment-grade bonds rose 0.64%. Treasury Inflation-Protected Securities (TIPS) added 0.44%. High-yield bonds fell 0.03%.

In the currency arena, the U.S. dollar gained 0.24%.

Energy-based commodities lost 2.10%. Broader-based commodities retreated 2.58%. Gold was unchanged.

Bob’s News & Updates

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