Dance to the Music

This years trustee’s report indicated that Social Security would become insolvent in 2041, with Medicare hitting insolvency in 2019. Should we cut benefits, raise taxes, raise the retirement age or just ignore it?

There was a song from the early 70s with the line “If you dance to the music, you’ve got to pay it to the piper (ask your momma).”  Now, I’m not sure how much momma knows about Social Security and Medicare, but, just recently, the Social Security and Medicare trustees said just about the same thing.

Every spring (it was late April this year) the trustees issue their report that warns us (and presumably our elected representatives as well) of when the trust funds will become insolvent.  This years trustee’s report indicated that Social Security would become insolvent in 2041, with Medicare hitting insolvency in 2019. 

The trustees even gave us an idea of the tax increase or benefit cuts that would be necessary to avoid insolvency.  For Social Security, a payroll tax increase of 1% would do the trick.  Payroll taxes are divided equally between employees and employers, so this would result in both the employee and employer tax rates increasing from 6.2% to 6.7%.  Social Security payroll taxes are paid out of the first $97,500 of earnings (2007).  If taxes are not raised and other solutions (e.g., private accounts, raising the retirement age, etc.) are not enacted, benefits would have to be cut 13%.

For Medicare, the payroll tax would need to be doubled, or benefits would have to be cut by 51% to avoid insolvency.  That would mean that today’s 2.9% tax (1.45% each for employees and employers) would become a 5.8% tax (2.9% each for employees and employers).  There is no limit as to the salary out of which Medicare taxes are taken.

Congress and the President will be required by law to address the projected Medicare shortfall in the 2009 budget.  Unfortunately, address it is all they are required to do; there is no requirement that they fix it.  They are not required to do anything about Social Security.

What can we do to have an impact on the decisions that will be made (sooner or later) in Congress?  We can contact our Congresspeople and let them know our thoughts on the current situation and our suggestions for fixing it.  I know that doesn’t sound like a lot, but it’s something every one of us can do.

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About the Author

John Grobe is President of Federal Career Experts, a firm that provides pre-retirement training and seminars to a wide variety of federal agencies. FCE’s instructors are all retired federal retirement specialists who educate class participants on the ins and outs of federal retirement and benefits; there is never an attempt to influence participants to invest a certain way, or to purchase any financial products. John and FCE specialize in retirement for special category employees, such as law enforcement officers.