Everyone and their next-door-neighbor has an opinion on the revised tax code. But whether or not you think the simplified tax brackets and the cuts to small businesses are brilliant, all agree that slashing taxes translates into budget cuts across government programs. This is due to the Pay-As-You-Go (PAYGO) Act that Congress passed in 2010 to keep the national deficit in check.
Unfortunately, the program that’s expected to take the biggest hit is also one that millions of Americans rely on: Medicare.
Medicare is what funds health insurance coverage for senior citizens and much of the disabled population. According to the law, only 4% of the Medicare budget can be trimmed. However, financial experts predict that the tax code that is now on the table could clean out the Medicare funds completely by 2029.
Why does the new tax code pose such an extreme threat to Medicare? Are any other programs under similar threat? Can individuals protect themselves?
There are so many questions – here’s what you need to know about the new tax code and its proposed impact on Medicare.
The actual cuts
Numbers are being thrown around the web with abandon, and there’s nothing like an unsubstantiated claim to instigate fear-mongering and generate panic.
Here’s the real deal: The tax bill will increase the federal deficit by approximately $1.5 trillion over the next decade.
It’s important to note that the tax code was created with the primary goal of increasing economic growth. However, it is unlikely that this growth will be significant enough to offset the resulting deficit.
Since the government has to fund this deficit, many programs are expected to suffer from budget cuts over the next few years. It is anticipated that Medicare will be subjected to automatic cuts to the tune of $25 billion – as early as next year.
That’s only the beginning, though. After several years of cuts, along with an undernourished economy from which to draw funding, there is talk of Medicare running out of money by 2029.
Which other programs will be affected?
Many social insurance programs will likely be subjected to cuts, including food stamps, WIC, unemployment benefits and Social Security. However, most of these programs receive their funding from a mix of mandatory and appropriated funds, so the expected cuts will not eliminate them completely.
Unfortunately, the two programs expected to be hit the hardest, Social Security and Medicare, are already struggling mightily to remain solvent. Both programs are currently running at deficits.
Even if they weren’t already battling a deficit, these programs are the ones that need the most funding. Medical costs, from long-term care to medications, only rise with time. In addition, the aging Baby Boomers far outnumber preceding generations and are likely to drain any available funds more quickly.
The Social Security Trust Fund reports that, if no further action is taken, its reserves will be depleted by 2034. If this indeed comes to pass, it can mean almost instantaneous poverty to millions of aging Americans.
Will those who are losing benefits receive a tax cut?
Ironically, the financial class that will be hit the hardest by the loss of funding for these programs will also be hit with a higher tax rate. Most middle-class Americans will be paying more in taxes under the new code, and the AARP has estimated that 1.2 million taxpayers age 65 and older will be paying higher taxes as well by 2019. By 2027, that number is expected to increase to 5.2 million.
What can you do about the impending change to the tax code?
Unfortunately, the average American can’t do anything about these imminent changes. You can hope that the code will change again and the damage done to these programs will reverse itself before any lasting harm is done, but that’s essentially out of your hands.
What you can do, though, is double down on all your retirement investments and try to put away a little more than you already are for your golden years. It isn’t easy to deny yourself something today to have a more comfortable tomorrow, but it’s the responsible thing to do. You don’t want to end up stuck with medical bills you can’t afford to pay or worse if the most awful predictions materialize and Medicare does indeed run out of money.
Protect yourself now! For tips on setting up or improving a retirement fund, call, click or stop by Destinations Credit Union to ask how we can help. We’ll assist you today so that you’re ensured a financially secure tomorrow.
Your Turn: Do you think Medicare will really run out of money? Why, or why not? Share your thoughts with us in the comments!