Social Security or Medicare: Which is the greater retirement risk?

Medicare's rising costs are a more significant threat to retirees' budgets than Social Security's solvency concerns. Healthcare expenses are poised to absorb a larger portion of retirement income, with Medicare projected to consume 38 cents of every average Social Security dollar by 2050. This growth outpaces Social Security's, driven by both an aging population and increasing per-beneficiary healthcare spending.

Unlike Social Security, Medicare's funding structure shifts more costs onto federal general revenues and retiree premiums. The Supplementary Medical Insurance (SMI) trust fund, which covers about two-thirds of Medicare spending, is reset annually based on projected costs. This means that as healthcare expenses climb, beneficiaries are likely to face higher premiums and cost-sharing, even though the trust fund itself doesn't have a depletion date.

Advisors should model healthcare as a distinct, rapidly growing expense rather than folding it into general inflation. Plan selection, whether traditional Medicare with supplemental coverage or Medicare Advantage, also has significant implications for out-of-pocket costs. The ultimate policy response to rising expenditures remains uncertain, but retirees must anticipate healthcare being a major, expanding component of their retirement budget.