The Social Security Administration threw a wrench into a lot of retirees’ plans on last Thursday when it announced that there will be no cost of living adjustment, or COLA, for Social Security benefits in 2016. In addition to retirees’ Social Security income remaining flat, approximately 30% of Medicare beneficiaries will face an increase of 52% in their Part B premiums under current law.
Medicare’s “hold harmless” rules
Under Medicare’s “hold harmless” rules, individuals who have their Medicare premiums automatically deducted from their Social Security checks cannot experience premium increases in years when there’s no COLA. This affects approximately 70% of Medicare Part B beneficiaries, transferring the burden of payment of premium increases to the other 30%.
While most individuals will continue to pay a monthly premium of $104.90, those who don’t have premiums automatically deducted from their Social Security checks will see an increase of 52%, with a monthly premium of $159.30 to $509.80 depending on the amount of their modified adjusted gross income.
Start vs. defer Social Security
Let’s say that you’re enrolled in Medicare Part B, you decided to defer your Social Security start date in order to increase your monthly benefit, and you’re paying your premiums directly to Medicare. Should you submit your Social Security benefit application before the end of the year to avoid the 52% increase in Medicare premiums?
There are three reasons why you probably shouldn’t do this:
1. The law may be changed.
AARP sent a letter to all members of Congress urging them to pass a Medicare fix. If there’s enough groundswell from retirees with the upcoming presidential election, it’s possible that the law may be changed by year-end to reduce the premium increase percentage.
2. The increase is temporary.
The Medicare Part B premium increase of 52% that’s being transferred to 30% of Medicare beneficiaries is currently effective only for 2016. There have been only two other years when the hold-harmless provision kicked in, 2010 and 2011. Those were the last two years when there was no COLA.
In 2010, the base Medicare Part B premium increased from $96.40 in 2009 to $110.50. While individuals who had their Medicare premiums automatically deducted from their Social Security checks continued to pay $96.40, those who didn’t paid the higher rate. The monthly base rate premium increased to $115.40 in 2011 before it was reduced to $99.90 in 2012.
3. Amount of increase is less than potential increase in Social Security benefits.
Assuming that you reached full retirement age, which is currently between 66 and 67 depending upon your year of birth, and you’re considering deferring, or have already deferred, your Social Security start date, your decision to defer or continue deferring shouldn’t be affected by the 2016 Medicare premium increase announcement in most cases.
While the percentage increase is 52% across the board, the monthly premium increase will be $54.40 to $174.10 depending upon the amount of your modified adjusted gross income (MAGI) in 2014. Medicare premiums are calculated using MAGI from tax returns two years prior to the current year.
The amount of the Medicare premium increase is much less than the annual, let alone cumulative, increase in Social Security benefits that can be achieved through deferral of one’s start date. Your monthly retirement benefit increases 8% per year for each year that you defer your Social Security start date from the time that you reach full retirement age until age 70. This translates to a lifetime annual increase in benefits of up to 24% or 32% depending upon whether your full retirement age is 67 or 66.
Let’s assume that your full retirement age is 66 and your monthly Social Security benefit at that age is $2,000. The following are your estimated monthly benefits and annual and cumulative benefit increases from age 66 through 70:
Given the fact a monthly Social Security benefit of $2,000 is 75% of the 2015 maximum benefit of $2,663, your monthly Medicare premium is probably $104.90 if your premium is automatically withheld from your benefit and would be $159.30 in 2016 if this isn’t the case. Since (a) the additional premium of $54.40 ($159.30 – $104.90) is approximately 25% to 33% of the annual increase in your Social Security benefit if you defer your start date, depending upon the number of years of deferral, and (b) the additional premium is only for one year, you should continue your plan of deferring your Social Security start date.
If you have been deferring, or were planning on deferring, your Social Security start date to increase your monthly benefit, don’t let the 2016 higher Medicare premiums derail your plan.
Robert Klein, CPA, PFS, CFP®, RICP®, CLTC® is the founder and president of Retirement Income Center in Newport Beach, California. Bob is also the sole proprietor of Robert Klein, CPA. Bob applies his unique background, experience, expertise, and specialization in tax-sensitive retirement income planning strategies to optimize the longevity of his clients’ after-tax retirement income and assets. He does this as an independent financial advisor using customized holistic planning solutions based on each client’s needs and personality.