One of the reasons that many people don’t defer the start date of their Social Security benefits beyond their full retirement age is the belief that their increased benefits will get eaten up by Medicare premium increases.
There are two reasons why this isn’t true:
- Social Security benefit increases far exceed Medicare premium increases.
- Benefit increases are protected from Medicare Part B premium increases.
Social Security Benefit Increases Far Exceed Medicare Premium Increases
Let’s assume that you’re 65, haven’t started receiving Social Security, your full retirement age (FRA) is 66, and your projected monthly benefit beginning at age 66 is $1,500. Since you’re eligible for Medicare at 65, you will pay your Medicare Part B premiums online, by check, or by credit card. Your premiums will automatically be deducted from your Social Security benefits once they begin.
If you defer your Social Security start date beyond your FRA, which is 66 to 67 depending upon when you were born, your monthly benefit will increase by 8% plus cost of living adjustments (COLAs) for each year that you defer your start date between FRA and age 70. This results in a benefit increase of as much as 32% plus COLAs for individuals whose FRA is 66 who wait until age 70 to begin receiving benefits.
The following table illustrates your projected net monthly Social Security benefit check at various start ages assuming no COLAs, your Medicare Part B premium is $104.90 with a 3% annual increase, and you haven’t elected to have income tax withheld from your check:
Net Benefit Increase
Per the table, the annual net benefit increase is 8.3% or 8.4%. Once again, this is assuming no Social Security benefit COLAs. In addition, the annual Medicare Part B premium assumed increase of 3% is conservative given the fact that there have been no increases since 2012 and the average annual increase has been 1.4% since 2007. Furthermore, with the recent signing of the Medicare Access and CHIP Reauthorization Act of 2015, there probably won’t be any increases in Medicare Part B premiums for individuals in low to moderate income tax brackets through 2018 (See Medicare Part B Premiums Increasing Up to 30%).
Benefit Increases are Protected from Medicare Part B Premium Increases
It’s pretty obvious that if you haven’t started receiving Social Security retirement benefits yet, your future benefit increases won’t get eaten up by Medicare premium increases assuming that you aren’t in a high income tax bracket. What happens, however, once you begin collecting benefits?
As previously pointed out, with the recent signing of the new Medicare legislation, Medicare Part B premiums probably won’t increase for individuals in low to moderate income tax brackets through 2018. Absent this change, there’s a “hold harmless” provision in the Social Security Act that was first implemented in 1987 that protects most Social Security recipients from reductions in benefit payments caused by Medicare Part B premium increases.
Specifically, if the increase in the Part B premium in a particular year would result in a reduction in the recipient’s payment compared to the year before, the Part B premium is reduced to ensure that the amount of the individual’s payment doesn’t decline. Higher-income beneficiaries, who are subject to higher Medicare Part B premiums, aren’t covered by the hold harmless provision.
In summary, your decision regarding when to start receiving Social Security shouldn’t be affected by potential Medicare Part B premium increases offsetting increased benefits. Furthermore, once you begin receiving benefits, your benefit increases are protected by law from Medicare Part B premium increases unless you’re a higher-income beneficiary.
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.