On Retirement

How Social Security claiming strategies affect Medicare premiums

One strategy may protect you from higher premiums in 2016; the other won't

Sep 23, 2015 @ 1:44 pm

By Mary Beth Franklin

Ever since I first wrote about the likelihood that there will be no cost-of-living adjustment in Social Security benefits in 2016, I have been inundated with questions from readers asking how their clients will be affected.

Although Social Security benefits are likely to be frozen at current levels in 2016 because of negligible inflation over the past year, some retirees could see a net reduction in their monthly benefits next year. That's because Medicare Part B premiums, which are usually deducted directly from Social Security payments, could increase for some beneficiaries, meaning their net Social Security benefits could decline in 2016.

The Social Security Administration and the Centers for Medicare and Medicaid Services are expected to announce the new 2016 levels for benefits and premiums next month.

FILE AND SUSPEND

Others who are enrolled in Medicare but have not yet collected Social Security benefits could see a steep increase in their Medicare premiums next year. That includes clients who have exercised the popular Social Security claiming strategy known as file and suspend, where they file for benefits but defer collecting them until age 70, when they are worth more.

Because they are not yet receiving Social Security benefits, they are not protected by the Social Security Act's hold harmless provision, which prevents most Social Security beneficiaries from experiencing a net decline in benefits as a result of an increase in Medicare premiums.

No COLA adjustment in Social Security benefits in 2016 means no Medicare premium increase in 2016 for most retirees.

But about 30% of beneficiaries, including higher-income retirees, new enrollees in Medicare in 2016 and Medicare recipients who are not collecting Social Security benefits, are not protected by the hold harmless provision. They will all pay higher Medicare premiums in 2016 — in some cases, a lot higher.

Clients who have filed and suspended their Social Security benefits can avoid next year's Medicare premium hike by collecting Social Security no later than November 2015 (with benefits paid in December) and having their Medicare premiums deducted from those benefits.

But advisers need to crunch the numbers to see if it is worthwhile to forfeit an additional 8% per year in Social Security delayed retirement credits between ages 66 and 70 in order to avoid a one-year increase in Medicare premiums that is likely to be $50 or more per month.

In a recent analysis on his “Nerd's Eye View” blog, Michael Kitces found that retirees who are within a year of turning 70 may want to claim Social Security by late this year to avoid the 2016 Medicare hike. That assumes their Modified Adjusted Gross Income for 2014, which determines 2016 Medicare premiums, is below the $170,000 level for couples or $85,000 for individuals that would trigger Medicare premium surcharges.

Younger retirees and higher-income retirees may be better off sticking to the plan of delaying Social Security until age 70, which would boost their full retirement age benefits by 32%. “The Medicare Part B increase may cost thousands of dollars, but a good decision on delaying Social Security benefits for four years can amount to hundreds of thousands of dollars,” Mr. Kitces wrote.

SPOUSAL BENEFITS

Clients who have exercised another popular Social Security claiming strategy known as restricting a claim to spousal benefits are in a better position when it comes to Medicare.

Because they are collecting their spousal benefits, which are worth half of their mate's full retirement age amount, they will be protected by the hold harmless provision assuming they meet two criteria: their Medicare Part B premiums are deducted directly from their Social Security benefits and their income falls below the $170,000/$85,000 limit that would trigger Medicare surcharges.

MEDICARE PREMIUMS

In 2015, most Medicare beneficiaries pay $104.90 per month for Medicare B, which covers outpatient services and doctor visits. Medicare A, which covers hospitalization, is free.

Retirees with Modified Adjusted Gross Incomes over the $170,000/$85,000 threshold pay higher premiums for both Medicare B and the Medicare D prescription drug program. MAGI includes annual adjusted gross income plus tax-free interest.

There are five Medicare premium brackets. In 2015, the surcharges range from $42 to $230.80 per month on top of the standard $104.90-per-month Part B premium. These premiums apply per person, so married couples where both spouses are Medicare age would pay twice as much.

The recently released 2015 Social Security and Medicare Trustees report projected a 52% increase in Medicare Part B premiums for 2016.

The majority of Medicare beneficiaries will continue to pay $104.90 per month for Medicare Part B in 2016. But if HHS increases Medicare Part B premiums by 52% as projected, new enrollees in Medicare, as well as Medicare beneficiaries who are not yet collecting Social Security benefits, are likely to pay $159.30 per month next year.

Higher-income retirees could see substantial premium hikes in 2016 — as much as $404.90 more per month per person compared to this year's base Medicare premium, according to the Center for Retirement Research.

(Questions about Social Security? Find the answers in my ebook.)

Mary Beth Franklin is a certified financial planner.

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