(PLEASE NOTE: The purpose of this Update is to provide notification that recent proposed legislation, which was passed by both Houses of Congress, could significantly impact Social Security and Medicare. When the legislation is signed into law, HealthView will distribute an official change notice.)
In the world of politics, legislative changes are often a slow, laborious process that require multiple debates and concessions on either side of the aisle. However, the new federal budget, which the President is expected to sign into law early this week, passed both Houses of Congress with surprising speed and decisiveness. This should be of great to concern to the majority of Americans because the bill includes important changes to both Social Security and Medicare.
The objectives are clear: the legislation reduces spending and extends the life of the Social Security and Medicare trust funds, but could come at a significant cost burden to current and future retirees.
Changes to Social Security
First, as was already reported, there will be no Cost Of Living Adjustment (COLA) in 2016 for Social Security recipients. The Trustees’ decision related to COLAs should come as no surprise, since for the third time in the past seven years, because of our low inflation rate, seniors will have to make ends meet with no additional financial assistance from Uncle Sam.
One attractive facet of Social Security is the number of claiming options offered, which provide retirees with some control over when to file and how much they can receive. (However, for those unfamiliar with the system, navigating these strategies can be difficult without assistance from a financial professional.) Congress is simplifying the filing process by limiting the “File and Suspend” strategy and phasing out the option known as “File Restricted.”
Unfortunately, as seems to be the norm lately, this may presumably reduce benefits for millions of retirees.
To provide some background so that we understand what’s ahead, let’s briefly review the options.
A person who files and suspends at full retirement age (FRA) can continue to accrue credits for delaying benefits until he/she starts taking payments (up to age 70), while a spouse can file and receive spousal benefits.
Someone who files a Restricted Application at FRA earns income based on the spouse’s record, then later files for benefits, with accrued delayed credits.
The elimination of the File Restricted option will not apply to retirees who have already taken advantage of this filing strategy or pre-retirees who reach age 62 in 2015. (Effectively, anyone born as late as 1953 will remain eligible to file a Restricted Application.)
Additionally, retirees who have suspended benefits and those who file to suspend benefits within six months of the date the bill is signed into law will be grandfathered in. After the initial six-month extension period, File and Suspend can only be utilized on a very limited basis.
Future retirees may still suspend benefits, but neither that person, nor his/her spouse, ex-spouse (or dependents) is eligible to receive Social Security income until the person who originally filed reinstates benefits.
The suspend option will primarily be used by someone who has been receiving benefits for more than one year, but decides to suspend until a later date (up to age 70).
So going forward, does it make sense for people to try to optimize Social Security benefits?
With more retirees facing a reduction in lifetime benefit, couples need to analyze alternative income streams based on various filing dates and actuarially calculated life expectancy. (Personalized longevity projections become even more critical in determining a break-even point and/or optimization level.) Income earmarked for dependents may also play an important role in determining the right time to claim.
Additionally, retirees need to be aware of their actual income after Medicare Part B premiums and surcharges are deducted from monthly Social Security checks and, if applicable, available survivor benefits. (It is important to note that survivor benefits may have a significant impact on the quality of life of the surviving spouse, as this income stream can also be used to pay for rising health care costs or long-term care services.)
Finally, when developing a successful investment strategy to fund retirement, income sources such as Social Security and pensions must be incorporated when determining how much savings will be required in a 401(k), IRA, Roth, and various insurance products.
Last week, the Update provided some analysis based on the preliminary 52% increase in 2016 Part B premiums projected by the Board of Medicare Trustees, but the budget bill reduced it to 14.4%.
Here’s more good news.
As stated in the previous Update, 70% of current retirees will not even have to pay the reduced 2016 premium hike.
The reason? A provision called Hold Harmless, which states that Medicare beneficiaries are not required to pay more than the equivalent of Social Security’s annual Cost of Living Adjustment for Part B increases – as long as the retiree is in Medicare’s first income bracket. Basically, the Hold Harmless provision prevents Social Security income from declining year to year. Since there will not be an increase in benefits in 2016, Medicare recipients in the first bracket who earn $85,000 or less in Modified Adjusted Gross Income (or a couple generating $170,000 or less) will not have to pay this year’s projected increase for Part B.
Who is taking the hit?
Individuals earning over $85,000 in MAGI (and couples over $170,000), new enrollees, and those who have delayed filing for Social Security benefits but have also enrolled in Part B of Medicare will be expected to pick up the slack and will see their monthly premiums rise by 14.4%. On the surface, this looks significantly better than 52%.
Digging a little deeper
The question now becomes: how does the Trust Fund overcome a premium decline from the suggested 52% to 14.4%? To start, in 2016, Medicare beneficiaries in the second to fifth income brackets will pay a $36 annual surcharge for five years; this, of course, comes on top of the 14.4% jump and additional means testing surcharges ranging from 37% to over 200%.
Starting in 2017, the other 70% of retirees whose income falls in the first bracket will pay the annual $36 surcharge in premiums.
In order to grasp the additional changes, it’s important to understand Medicare Part B coverage, which addresses a large portion of costs related to doctor appointments and tests, emergency room visits, and some medical supplies (such as wheelchairs after an initial deductible is met). Fortunately, Medicare enrollees can sign up for additional supplemental insurance, which can cover the deductible, as well as other expenses.
Today, two of the more popular supplemental policies are Plans C and F. Why? It is probably no coincidence that both high-end plans not only cover Part B deductibles, but also have policyholders who utilize the system far more than retirees with less coverage. Translation? The better the coverage, the more likely retirees will use it, which results in more treatments and a greater strain on the Trust Fund.
Solution? Supplemental insurance companies will probably be restricted from covering Medicare Part B deductibles for retirees enrolling after 2020. The theory is that this will discourage beneficiaries from frequently accessing the system because they will be forced to pay deductibles out-of-pocket.
Currently the Part B deductible is $147, but this amount will likely rise by 2020, making a bigger dent in retirement income for beneficiaries.
Perhaps the most important takeaway from the last few weeks is adjustments to Medicare and Social Security are coming, and they will assuredly continue to have an impact on both future and current retirees by limiting Social Security income while increasing health care costs. This leaves financial professionals with the responsibility of making sure their clients are educated and informed about changes in the system and available savings strategies that can help maintain a desired retirement lifestyle.