Social Security, Medicare and Americans’ Confidence in Their Retirement Future

Academics, policymakers and the media have been sounding alarms about shortfalls ahead for Social Security and Medicare for some time now. And many Americans have taken their warnings to heart, according to Watson Wyatt’s 2007 U.S. Survey of Older Employees’ Attitudes Toward Lump Sum and Annuity Distributions From Retirement Plans. Roughly 61 percent of older workers — those 50 to 64 years old — are not confident of receiving unreduced Medicare benefits, and 52 percent are not confident of receiving unreduced Social Security benefits, according to the survey.

Those older workers who are least confident of their financial readiness for retirement also express the least confidence in Medicare and Social Security. Workers in their early 50s, high school graduates and women tend to be more pessimistic about receiving their full benefits than workers in their late 50s and early 60s, college graduates and men.

The Employee Benefit Research Institute reports that workers’ confidence in having sufficient retirement resources fell sharply in 2007 due to rising health costs, worries about the economy and the housing slump.¹ Older workers and retirees without employer-sponsored retirement and retiree medical plans are very worried about their financial future, according to Watson Wyatt research.²

In our 2007 survey, Watson Wyatt asked a national panel of older workers — those 50-64 years old — about their expectations for Medicare and Social Security, employer-sponsored retirement plans, retirement planning and other related issues. In this article, we explore the links between older Americans’ loss of faith in these programs and their overall retirement confidence. We also look at the relationships between older workers’ concerns and their age, sex, marital status, education and income.

The Future of Medicare and Social Security
Medicare has several parts. Under Part A, the hospital insurance (HI) trust fund pays for inpatient hospital services and skilled nursing facilities, home health care and some hospice care. Part A is financed by the payroll taxes paid by employers and workers. Under supplemental medical insurance (SMI), Part B covers physician and outpatient hospital services, and Part D, enacted in 2003, covers prescription drugs. More than 75 percent of benefits under Parts B and D are financed by general tax revenues — beneficiaries’ premiums finance less than 25 percent of benefits.

There has been considerable discussion about the higher out-of-pocket payments and premiums that will be necessary in the future and how these costs will affect retirees. In 2007, retirees’ average out-of-pocket expenditures — including premiums, deductibles and coinsurance for Medicare parts B and D — amounted to 29 percent of the average Social Security benefit. But by 2040, SMI out-of-pocket expenses are expected to consume about 53 percent of the average Social Security benefit.³

All American workers who have paid into the system for 10 years and are at least age 62 — and their spouses — are entitled to Social Security benefits. Under current law and projections, the average income replacement rate at normal retirement age — the share of working income replaced by Social Security benefits — is expected to be considerably lower in 2038 than it is today for three reasons.⁴

One, the normal retirement age will rise from 65 in 2000 to 67 for those who reach 62 in 2022, which will lower monthly benefits for those who retire at 65 and provide fewer years of benefits for those who delay retirement. Two, Medicare Part B premiums, which are automatically deducted from Social Security benefits, are projected to increase from 6 percent to 9 percent of benefits by 2030. Three, significantly more recipients will have to pay taxes on their benefits in the future. Under current law, individuals making less than $25,000 and married couples making less than $32,000 — roughly 80 percent of recipients — do not pay taxes on these benefits. However, the thresholds are not indexed for wage growth or inflation, so the tax-paying pool will significantly expand.

As more Americans become eligible for Medicare and Social Security, the current costs of these programs will balloon even as the supporting tax base shrinks.⁵ According to the 2008 Social Security trustees’ report, payouts will begin exceeding incoming revenue in 2017, and the system is projected to be insolvent by 2041. Medicare is even worse off, being vulnerable to escalating health care costs that are outpacing overall inflation, incomes and taxes. Dedicated tax revenues for the HI segment of Medicare have already fallen below annual spending, and — barring an immediate and effective intervention — the trust fund is expected to be exhausted by 2019.

The declining financial status of Medicare and Social Security will not only affect Americans’ retirement income and health care — it will also put an enormous burden on the government and future workers. Both programs will be paying out benefits to a much larger group of retirees, while workers paying into the system will make up a shrinking share of the population.

Older Workers’ Confidence in Medicare
Roughly 61 percent of older workers are not confident of receiving Medicare benefits at currently projected levels — they’re expecting the government to pare back their benefits, according to the survey. We also asked respondents about their confidence in having sufficient financial resources at different stages of retirement.⁵ To determine how confidence or the lack thereof in Medicare affects respondents’ confidence in their overall retirement resources (or vice versa), we cross-tabulated their responses to levels of confidence in Figure 1.

Approximately 96 percent of older workers who are confident of having enough money to live comfortably five years into retirement are also somewhat or very confident of receiving unreduced Medicare benefits. However, only 87 percent of older workers who are not sure their financial resources will last through the first five years of retirement are somewhat or very confident about receiving unreduced Medicare benefits. Looking farther along the retirement horizon, roughly 67 percent of respondents who are somewhat or very confident of having sufficient financial resources after 20 years of retirement are also somewhat or very confident of receiving their promised Medicare benefits. However, only 44 percent of respondents who worry that their retirement resources won’t stretch that far are somewhat or very confident that their full Medicare benefits will be there for them.

Figure 1
Effect of Confidence in Medicare Benefits on Older Workers’ Confidence in Their Overall Retirement Resources

Source: U.S. Survey of Older Employees’ Attitudes Toward Lump Sum and Annuity Distributions From Retirement Plans, Watson Wyatt, 2007.

Older Workers’ Confidence in Social Security
When we asked older workers how confident they are about their projected Social Security benefit, roughly 52 percent say they do not expect to receive the promised amount. To determine whether these respondents’ pessimism about their Social Security benefits makes them less confident about their retirement (or vice versa), we cross-tabulated the older workers’ responses to their confidence in having sufficient financial resources for a comfortable retirement (Figure 2).

Older workers who are approaching retirement with confidence are also more confident about receiving their entire projected Social Security benefit. About 96 percent of workers who are confident of having sufficient resources five years into retirement are somewhat or very confident about their Social Security benefits. Approximately 85 percent of those who worry about having enough resources to live comfortably five years into retirement are somewhat or very confident about their Social Security benefits.

While confidence in one’s retirement resources declines as the retirement period lengthens, it remains linked to confidence in Social Security’s ability to keep its retirement promises. Roughly 66 percent of older workers who believe their retirement resources will stretch more than 20 years into retirement are also somewhat or very confident of receiving unreduced Social Security benefits. However, only 41 percent of older workers who fear their resources will wear thin after 20 years of retirement are somewhat or very confident of receiving unreduced Social Security benefits.

Figure 2
Effect of Confidence in Social Security on Older Workers’ Confidence in Their Overall Retirement Resources

Source: U.S. Survey of Older Employees’ Attitudes Toward Lump Sum and Annuity Distributions From Retirement Plans, Watson Wyatt, 2007.

Who Worries More?
To determine whether certain personal characteristics are linked to worries about Medicare and Social Security, we cross-tabulated respondents’ confidence in these programs with their age, gender, marital status, education level and income.

About Medicare

Figure 3 shows older workers’ confidence in receiving their promised Medicare benefits by age, gender and marital status. Respondents in the 50-54 age group are much less confident of receiving their full Medicare benefits than older respondents. Approximately 65 percent of the younger group are either not too confident or not at all confident, compared with 60 percent of respondents in the 55-59 age group and 52 percent of respondents in the 60-64 age group. Women are more likely to be less confident than men about the government making good on its Medicare promises. Sixty-four percent of responding women have little to no confidence in the system compared with 58 percent of men. However, there is little difference in confidence levels between married and unmarried respondents — 60 percent of unmarried respondents have little to no confidence in Medicare’s ability to keep delivering the goods and 61 percent of married respondents feel the same way.

Figure 3
Older Workers’ Confidence in Receiving Unreduced Medicare Benefits by Age, Gender and Marital Status

Source: U.S. Survey of Older Employees’ Attitudes Toward Lump Sum and Annuity Distributions From Retirement Plans, Watson Wyatt, 2007.

Workers with more education tend to have more confidence in the system (Figure 4). Roughly 78 percent of older workers with less than a high school education have little to no confidence that their Medicare benefits will remain the same. Approximately 64 percent of respondents with a college degree and 57 percent of respondents with a graduate degree do not feel certain that Medicare will be able to pay out the same benefits in the future.

Figure 4
Older Workers’ Confidence in Receiving Unreduced Medicare Benefits by Education Level

Source: U.S. Survey of Older Employees’ Attitudes Toward Lump Sum and Annuity Distributions From Retirement Plans, Watson Wyatt, 2007.

The links between confidence in Medicare benefits and income are mixed (Figure 5). Interestingly, respondents whose income falls into the second quartile — $30,000 to $47,999 — are the least confident of their future Medicare benefits. Sixty-eight percent of them are not too confident or not confident at all, compared with roughly 57 percent of respondents in the first quartile, 62 percent of respondents in the third quartile and 58 percent of respondents in the fourth quartile.

Figure 5
Older Workers’ Confidence in Receiving Unreduced Medicare Benefits by Income Quartile

Source: U.S. Survey of Older Employees’ Attitudes Toward Lump Sum and Annuity Distributions From Retirement Plans, Watson Wyatt, 2007.

About Social Security

Logically enough, younger respondents are the most pessimistic about Social Security (Figure 6). Approximately 60 percent of respondents aged 50-54 are not too confident or not at all confident of receiving their promised Social Security benefits, compared with 50 percent of respondents aged 55-59 and 38 percent of those aged 60-64. As was true for Medicare benefits, women have less confidence in the system than do men. Roughly 56 percent of women are not too confident or not at all confident of receiving their full Social Security benefit, compared with 49 percent of men. However, married and unmarried respondents express similar confidence levels — around 52 percent are not too confident or not at all confident of receiving their full Social Security benefits.

Figure 6
Older Workers’ Confidence in Receiving Unreduced Social Security Benefits by Age, Gender and Marital Status

Source: U.S. Survey of Older Employees’ Attitudes Toward Lump Sum and Annuity Distributions From Retirement Plans, Watson Wyatt, 2007.

Like the respondents for Medicare, respondents with less education tend to have less confidence in Social Security (Figure 7). Roughly 65 percent of those without a high school degree are not too confident or not at all confident of receiving all their Social Security benefits, compared with roughly 55 percent of those with a college degree and 52 percent of those with a graduate degree.

Figure 7
Older Workers’ Confidence in Receiving Unreduced Social Security Benefits by Education Level

Source: U.S. Survey of Older Employees’ Attitudes Toward Lump Sum and Annuity Distributions From Retirement Plans, Watson Wyatt, 2007.

While income doesn’t seem to matter much — as was true for Medicare — respondents whose incomes fall into the second quartile express less confidence in Social Security than do other respondents (Figure 8). Roughly 58 percent of older workers in the second quartile are not too confident or not at all confident of receiving all their Social Security benefits, compared with 50 percent of those in the third and fourth quartiles and roughly 52 percent of those in the first quartile.

Figure 8
Older Workers’ Confidence in Receiving Unreduced Social Security Benefits by Income Quartile

Source: U.S. Survey of Older Employees’ Attitudes Toward Lump Sum and Annuity Distributions From Retirement Plans, Watson Wyatt, 2007.

When Worlds Collide
While the U.S. government is under a lot of pressure to do something to avert the looming financial crises in Social Security and Medicare, there are no easy answers. Options are generally some variation of raising taxes or lowering benefits, neither of which may be politically palatable, particularly as older Americans become a larger share of the voting population.

Most older workers are not convinced their projected Social Security and Medicare benefits will be there when they need them. Confidence is particularly low among those who are younger, female and less well-educated. And those who worry most about having sufficient resources for retirement also tend to be the least confident of Medicare and Social Security. People with less overall confidence in their retirement resources might worry more about Social Security and Medicare at least partly because they depend on it more. The government needs to act sooner rather than later to restore confidence in these programs and enable American workers to adjust their expectations and plans to the retirement realities ahead.

Retirement income has traditionally been likened to a three-legged stool consisting of government plans, employer plans and personal savings. The Pension Protection Act of 2006 (PPA) encourages employers to continue providing retirement plans for their employees, clearing away many of the hurdles that were blocking defined benefit hybrid plan designs. Now would be a good time for the government to ensure that its own programs can support the weight of future retirement demands.

Because many workers are insecure about their personal retirement plans, this would also be a good time for employers to provide more financial literature to help workers make the most of these plans and understand how to better prepare for their retirement.

¹ EBRI Issue Brief, No. 316, April 2008.
² “The Role of Employer-Provided Benefits in Americans’ Confidence About Retirement,” Watson Wyatt Insider, June 2008.
³ 2007 Medicare trustees’ report.
⁴ Munnell, Alicia H., “The Declining Role of Social Security,” Boston College Center for Retirement Research, No. JTF6, February 2003. Available at the Social Science Research Network Web site: http://ssrn.com/abstract=556792.
⁵ “The Role of Employer-Provided Benefits in Americans’ Confidence About Retirement,” Watson Wyatt Insider, June 2008.