Trump 2.0: Planning around uncertainty

By Ron Mastrogiovanni

“There are known knowns, known unknowns, and unknown unknowns,” according to the late former defense secretary, Donald Rumsfeld.

Twenty years later, this is sage advice for advisors and clients thinking about retirement planning and, specifically, planning for potential changes to retirement health care costs under President-elect Donald Trump.

Trump promises made

There are the known knowns of promises Trump has made for his second term: No reduction in Social Security or Medicare benefits or extending eligibility ages; eliminating federal income tax on tips and Social Security; repealing the Inflation Reduction Act.

While we should take the president-elect at his word and trust that he will do everything he can to ensure promises made will be promises kept, there are known unknowns. The principal unknown is how we will pay for these election promises.

For advisors and clients, the idea of a new Golden Age for America in which a thriving economy will raise all boats can be considered a possibility, but not a prudent basis for retirement planning.

Social Security

As we detailed in a recent white paper looking at the financial impact of proposals to address Social Security’s funding shortfall, unless changes are made, the trust fund will only be able to pay 79% of promised benefits starting in 2034. An affluent couple retiring in 20 years would lose more than $900,000 in benefits under this scenario.

Increasing revenue to the trust fund or decreasing benefits are the primary ways to ensure the Social Security will be able to meet its current benefits promises. The only alternative would be for the government to make up the difference – which would still have to be paid for.

Reducing benefits, increasing employee and employer contributions to the program and raising or eliminating the cap on contributions for the wealthy offer the clearest path to addressing Social Security’s shortfall. Raising the full retirement age would also improve the program’s solvency

The president-elect’s promise to maintain benefits while cutting revenue sources will, according to most experts, lead to Social Security running out of funds significantly sooner than current predictions.

Medicare

Regarding Medicare, there’s a similar fundamental economic challenge with the promise to maintain benefits and the stated desire to repeal the Inflation Reduction Act.

Trump has long been an advocate of Medicare Advantage, which since 2016 has grown from 33% to 54% of the market versus traditional Medicare. At the same time, the cost to the government for Medicare overall has increased by around 50% - driven both by baby boomer demographics and the rising cost of medical services and drugs.

Retirement health care provisions within the Biden administration’s Inflation Reduction Act have sought to slow the increase in costs by allowing the government to negotiate lower drug costs, capping the cost of insulin and other drug prices, and reducing the catastrophic limit on drug out-of-pocket costs from $8,000 in 2024 to $2,000 in 2025.

Although these changes will have a beneficial impact on retirement health care expenses for retirees with multiple chronic health conditions, the changes to the cost allocation methodology between the government and carriers has driven premiums significantly higher for mid- and high-end Part D plans.

In HealthView Services’ 2025 Part D Premiums Data Report our analysis of plans offered by national carriers showed average premiums rising by 11% and high-end plans by more than 20%. Over two years, average plans have increased by more than 40% and high-end plans have more than doubled. Consistent with the idea of “shrinkflation,” retirees and the government are paying more for less coverage as carriers adjust to the new economics of the system.

Repealing the Inflation Reduction Act would have significant consequences and raises the key questions: What would it be replaced with? What will be eliminated and what will be kept? And what would be the consequences of taking the brakes off price increases that the IRA has introduced into Medicare?

Investing

From an investment and 401(k) standpoint, Trump will be market and crypto-friendly, so no surprise to see a bullish response to his election.

Promises to cut costs, reduce taxes and avoid increasing the fiscal deficit would be on the wish list of most Americans. The ability to do so, without touching Social Security and Medicare, may be wishful thinking.

The implementation of tariffs on foreign goods from an economic standpoint comes with significant financial risk, not the least of which is inflation and continued high interest rates.

As we all know, expecting an uninterrupted rise in markets during a Trump presidency is unrealistic.

Unknown unknowns under Trump

From a retirement planning standpoint – although we can bring a broad-brush perspective to anticipating changes – we simply do not know what will happen over the next four years.

This is not new territory for advisors working with clients to build plans for the retirement long haul. The election presents a significant opportunity to help clients manage through the uncertainty of what will come next and the range of risks across the spectrum of retirement planning.

As we have argued for some time, to make the math work, the long-term expectation for Social Security should be that benefits will be reduced unless revenue is raised to fund promises made.

Given the popularity of the program and the incoming president’s support, Social Security will not go away anytime soon, but it is unlikely to remain the same as it is today. In conversations we’ve been having with financial services institutions that use our planning tools and data, advisors are focused on working with clients to manage expectations around potential benefit reductions and determine increased savings required to address that gap.

For retirement health care planning and Medicare, the reality of four decades of data is that we should expect health care costs to continue to rise at a significantly faster rate than consumer prices. The Inflation Reduction Act’s provisions may slow the pace of increase of drug prices but if repealed, all bets are off. The risk is that the cost genie is let out of the bottle and prices rise until they find a new level.

We do not believe there is a magic wand to address this challenge. Simply put, retirees should expect to pick up a greater share of the cost of health care over time. The way to plan for this is to project future expenses using the best available data and build this into retirement plans from both a savings and decumulation perspective.

From an investment perspective, four years is a blip in a long-term retirement savings and decumulation trajectory, taking the long view remains key.

The election is an opportunity to reach out to clients to discuss what we know and what we still don’t know about Social Security, Medicare and the investment outlook. With the uncertainty that comes with any new administration, revisiting retirement plans to ensure savings, portfolios and product choices are structured to manage through a range of potential scenarios is prudent.

This is a known known advisors can work with.