Here's a riddle: How can Medicare premiums remain the same in 2017 and 2018 yet result in a 23% increase for millions of retirees?
That's the quandary that many financial advisers will face next year when they try to explain to some retired clients why their Social Security check, after deducting for Medicare premiums, will be smaller in 2018 compared to this year.
Blame it on the "hold harmless" provision designed to protect most retirees from a net decline in Social Security benefits from year to year. The provision prohibits annual increases in Medicare Part B premiums, which pay for doctor's visits and outpatient services, from exceeding the dollar amount of annual Social Security cost-of-living adjustments (COLA).
The hold harmless provision applies to about 70% of retirees who have their Medicare Part B premiums deducted directly from their monthly Social Security payments.
The remaining 30% are not protected because they do not receive Social Security benefits; are directly billed for the Medicare Part B premiums; enrolled in Medicare for the first time in 2017; or pay a high-income Medicare premium surcharge.
"After several years of no or very small increases, Social Security benefits will increase by 2% in 2018," the Centers for Medicare & Medicaid Services said last week in announcing the new Medicare premiums for 2018. "Therefore, some beneficiaries who were held harmless against Part B premiums increases in prior years will have a premium increase in 2018."
The agency estimated that 42% of Part B enrollees who are subject to the hold harmless provision—most of whom pay $109 per month for Part B in 2017—will pay the full $134 per month in 2018. That's a 23% increase.
About a quarter of all Medicare enrollees will pay less than $134 per month for Medicare Part B in 2018 because their Social Security COLA will increase by less than $25 per month next year, the agency said.
"This will be the largest Medicare Part B increase in five years after premiums remained relatively flat since 2013," said Mary Johnson, a Social Security and Medicare policy analyst for The Senior Citizens League, a nonpartisan advocacy group.
"While hold harmless is a very valuable protection, the lack of an adequate COLA to begin with and rapidly growing Part B costs will keep millions of beneficiaries stuck in a no-growth rut in 2018," Ms. Johnson said. "And that leaves nothing to meet other rising costs such as medigap premiums, Part D (prescription drug) premiums, out-of-pocket costs or anything else."
For example, a single retiree with a modified adjusted gross income of $85,000 or less in 2016 would pay $134 per month for Medicare Part B in 2018. If she had been protected by the hold harmless provision and paid $109 per month for Part B this year, her premium would increase by $25 per month next year—wiping out most or all of her Social Security benefit increase for 2018.
But if that same retiree had enrolled in Medicare for the first time in 2017, she is not protected by the hold harmless provision and is already paying $134 per month for Medicare Part B. Next year, she will still pay $134 per month, but will be able to enjoy her full Social Security COLA. Assuming she received $1,600 per month in Social Security benefits this year, her benefit would increase by 2% or $32 per month next year.
Individuals with modified adjusted gross incomes (MAGI) of $85,000 or more in 2016 and married couples whose joint income exceeded $170,000 in 2016 will pay a high-income surcharge on both their Medicare Part B and D premiums next year. MAGI includes all the income reported on 2016 tax returns plus any tax-exempt interest.
Although the amount of the surcharges will stay the same, ranging from an additional $53.50 to an additional $294.60 per month per person in 2018, some of the income tiers that trigger those surcharges will change next year.
The changes will affect individuals with MAGIs of $133,500 or more in 2016 and married couples whose joint income topped $267,000. Medicare premium surcharges are based on the latest available tax return.
For example, an individual with a MAGI of $150,000 in 2015 was in the third income tier in 2017 and paid a surcharge of $133.90 per month for a total Medicare Part B premium of $267.90 this year.
Next year, individuals who reported income between $133,501 and $160,000 in 2016 will be moved into the fourth income tier. They will pay a surcharge of $214.30 per month for a total Medicare Part B premium of $348.30 per month in 2018—an increase of about $80 per month.
Income brackets are doubled for married couples and surcharges apply per person.