Back in July 2016, I wrote an article in relation to the concept of “Financial Freedom,” which is the process of acquiring assets that produce cash flow, while simultaneously keeping your personal expenses low (or manageable) to where the cash flow from your assets can cover your personal expenses. But a major debate within personal finance circles centers around Social Security along with its sister program Medicare, in regards to if these programs are indeed “assets” or are they just another form of taxation that the government imposes on the American people to waste on fruitlessly.
It is of my personal opinion that Social Security and Medicare are assets, and for this article, I will discuss both programs, along with why I believe these assets can be efficient tools for retirement planning, estate planning, disability insurance, estate planning, and health insurance benefits.
What Is Social Security and Medicare?
Social Security was signed into law back in 1935 by President Franklin D. Roosevelt, as an attempt to provide for Americans who were living longer than prior generations. The Medicare program was signed into law in 1965 by President Johnson, as an attempt to provide health insurance benefits for older Americans along with younger Americans who were suffering some sort of disability related ailment.
Both programs are funded through payroll taxes that are paid through the Federal Insurance Contributions Act (FICA) when there’s both an employer and employee contribution, or paid through the Self Employment Tax when there’s just an employer contribution. The taxes are paid into two Social Security Trust Funds and two Medicare Trust Funds.
- When there’s an employer and employee situation, FICA is divided up as 6.2% for the employer and 6.2% for the employee, up to $127,200 of income (for 2017) that’s paid into the two Social Security Trust Funds, with 1.45% paid by the employer and 1.45% paid for the employee into the two Medicare Trust Funds with no income cap.
- When there’s just an employer situation (self-employment), the Social Security and Medicare Trust Funds are funded through the Self-Employment Tax. This tax is broken down by 12.4% up to $127,200 in income for the Social Security Trust Funds and 2.9% for the Medicare Trust Funds, with no income cap.
Social Security Trust Funds
There are two Social Security Trust Funds. They include The Federal Old-Age and Survivors Insurance Trust Fund and The Federal Disability Insurance Trust Fund.
- The Federal Old-Age and Survivors Insurance Trust Fund: This covers both the retirement benefits along with the survivors benefits, which provides pay-out to the spouse and children of a deceased American that paid into the social security system. This fund operates using a credit system to determine when one qualifies for potential payouts in the form of retirement benefits. 1 credit is provided for $1,300 of earnings, with up to a maximum of four credits per year. Once you hit 40 credits, you now qualify for retirement benefits, which means, you’ll need at least 10 years of work in order to build enough credits to qualify.
- The Federal Disability Insurance Trust Fund: This covers disability payments to Americans that paid into the social security system, which can help with living expenses and other expenses while being disabled. This fund also operates using a credit system to determine when one qualifies for potential payouts in the form of disability benefits. If you are disabled before the age of 24, you need to have built up six credits, which translates into about 1 1/2 years of work history. If you are 24 to 30, you need credits that equate to half of the time between the age of 21 and the time you became disabled. If you are 31 and older, you need to have built at least 20 credits and the credits increase as your age increases
Medicare Trust Funds
CMS (Centers for Medicare and Medicaid Services) is a branch of the Department of Health and Human Services that helps to run, monitor, and manage the Medicare program. The Medicare program has three main parts to it that are managed by the Federal Government, these portions include Medicare Part A, Medicare Part B, and Medicare Part D. Medicare Part C gives Americans the option to get their Medicare benefits from a provide health insurance company rather than through the Federal Government. Taxes for Medicare Part A, Part B, and Part D are paid into two different trust funds of the Federal Government, and include the following:
- The Federal Hospital Insurance Trust Fund: This covers Medicare Part A benefits which include medically required inpatient hospital services, nursing facilities, hospice care, and home healthcare services. Similar to Social Security retirement benefits, this fund operates using a credit system with 1 credit being provided for $1,300 of earnings, with up to a maximum of four credits per year. Once you hit 40 credits, you now qualify for Part A benefits without having to pay a premium for them.
- The Federal Supplementary Medical Insurance Trust Fund: This covers Medicare Part B and Medicare Part D benefits. Medicare Part B benefits include medically required outpatient hospital services, doctor care, preventive care, medical equipment, testing/X-rays, mental health services, and home healthcare procedures not covered under Medicare Part A. Medicare Part D covers prescription drugs that are provided through private insurance companies that the Federal Government is contracted with.
Are These Assets?
Social Security and Medicare are indeed forced retirement, disability insurance, and health insurance plans that you are paying into, which will be a great complement to your IRA and other retirement vehicles down the line. For that reason alone, you should view these programs as Assets.
But Will They Still Be Around?
A recent Social Security Trustees Report is showing that Social Security has nearly $3 trillion in reserves and might continue to run a surplus until 2019 (a surplus streak that’s been running since 1982). But by the middle of 2020, estimates are showing that the program could begin to show deficits that by the year of 2034, could deplete all surpluses to the point where the program can only survive based on the amount of annual tax revenue that’s coming in (which won’t cover the number of retirees at that time).
In relation to Medicare, a recent Medicare Trustees Report is showing that Medicare will be solid until 2029, when during said year it’s estimated that the fund will only be able to cover about 90% of claims.
The reasons for these issues are due to longer life spans and the significant amount of Baby Boomers that will be filing for Social Security and Medicare related benefits. Politicians in charge of these programs must begin to pay attention to the trends, estimates, and reports, so that those of us paying in today (which includes my generation, The Millennial generation) will be able to benefit from these asset based programs come 2042, when the oldest of our generation begin to file claims.
This article was originally written on October 18, 2017 and updated on January 29, 2021.