Medicare Means Testing?
Medicare currently provides health coverage to over 50-million subscribers. Enrollment is projected to reach 64 million in 2020 and 81 million in 2030. Couple this with a projection of only 2.5 workers to every retiree by 2030, and this federal entitlement will likely dwarf all other spending programs. To increase funding, The Medicare Modernization Act set out to charge more to those who could “afford” it, and means testing for Parts B and D was officially introduced in 2007. This basically translates into “The more you make, the more you pay.”
MAGI and Income Thresholds
In order to fully gage the impact of means testing surcharges, it is necessary to understand that Medicare defines MAGI as almost every potential source of income—including working in retirement, Social Security, pensions, required minimum distributions, earned interest, and capital gains. Once MAGI surpasses $85,000 for a single person or $170,000 for a couple, surcharges are levied. There is also a two-year look-back period, which means that any income earned at age 63 can be counted when the subscriber signs up at 65. This rule can also become especially troublesome at age 70½, when required minimum distributions (RMDs) must be taken, or when a spouse passes away, which may leave an income stream that could vault the survivor into a higher income bracket.
Crossing the first surcharge threshold increases Medicare Parts B and D by an average of 35%, and surpassing the highest thresholds will inflate costs by more than 200%. The brackets are not indexed to inflation, and if Medicare is to remain viable as millions more enter the system, it is unlikely that Congress will consider raising them any time soon. This is extremely important because, as household incomes rise with inflation, it is only a matter of time before more future Medicare subscribers – and not necessarily affluent ones – find themselves in higher thresholds. In fact, according to recent data from HealthView Services, over 35% of client illustrations, ranging in age from their late 40s to mid-60s, are expected to incur Medicare surcharges.
|2017 Medicare Premiums and Surcharges by MAGI Bracket|
|IndividualIncome (MAGI)||Married Income (MAGI)||Medicare Part B||Medicare Part D|
|Under $85,000||Under $170,000||$134.00||Your state’s plan premium|
|$85,001-$107,000||$170,001-$214,000||$134.00 + $53.50||Premium + $13.30|
|$107,001-$160,000||$214,001-$320,000||$134.00 + $133.90||Premium + $34.20|
|$160,001-$214,000||$320,001-$428,000||$134.00 + $214.30||Premium + $55.20|
|Above $214,000||Above $428,000`||$134.00 + $294.60||Premium + $76.20|
The data above only include basic Medicare and do not incorporate costs related to supplemental insurance; out-of-pocket costs related to vision, hearing, podiatry, and dental; or long-term care.
Impact on Social Security
The Medicare Modernization Act also initiated a policy change that ensured Medicare premiums would be deducted from Social Security disbursements. As costs related to Parts B and D grow, Social Security benefits will inevitably shrink. With health care inflation projected to outpace anticipated Social Security cost of living adjustments (COLAs) by a three to one margin – and more retirees slated to face means testing in the future – it is likely that a large percentage of retirees will see more of their Social Security income consumed by health care costs.
Means Testing Is Here to Stay
It is tempting to view current Medicare premiums and surcharges as manageable, and income brackets too high for most to worry about, but that would be a mistake. This sentiment may be true for some current retirees, but over time, even low wage inflation will vault more people across MAGI brackets. Combine this with rising health care cost inflation, and aging Americans will experience much higher out-of-pocket costs and premiums throughout retirement.
The optimistic notion that the government will raise thresholds, or that health care inflation rates will decline significantly, is not realistic. With tens of millions set to enter the already distended Medicare system over the next two decades, surcharge brackets are unlikely to change any time soon.
While means testing is likely to surprise many retirees on fixed budgets, planning solutions are available. Next time, we will examine some means-testing case studies and investigate potential solutions to offset the impact of this substantial retirement expense.