Social Security benefits are expected to increase slightly next year, and most retirees who have their Medicare premiums deducted directly from their Social Security benefits will be protected from a net decline in monthly benefits.
However, clients who are enrolled in Medicare but not yet collecting Social Security could see a big increase in their monthly Medicare premiums in 2017. So could clients whose income tops $85,000 if they are single or $170,000 if they are married.
That's because the Social Security Act includes a “hold harmless” provision that prevents a person's Social Security benefits from declining from one year to the next due to an increase in Medicare premiums. For most beneficiaries, that means Medicare Part B premiums, which pay for doctors' visits and outpatient services, cannot increase by more than the monthly increase in Social Security benefits next year. The 0.2% COLA projected by the Social Security Trustees would result in a benefit increase of a few dollars per month in 2017.
In order to be covered by the hold-harmless umbrella, a person must apply for Social Security by November 2016 so their monthly Medicare premium can be deducted from their Social Security benefit that is paid in December. That scenario prompted one InvestmentNews reader from Houston to ask whether he should abandon his plan to delay claiming Social Security until age 70 and instead begin collecting benefits when he turns 66 this October.
“It seems to me that I could experience a spike in Medicare premiums next year that could outweigh the benefits of delaying Social Security income,” he wrote. His situation provides an interesting case study on the interaction of Social Security, Medicare and modified adjusted gross income.
Anyone who enrolls in Medicare for the first time in 2016 and whose MAGI is below the $85,000/$170,000 threshold pays a standard monthly Part B premium of $121.80. About 70% of beneficiaries enrolled in Medicare prior to 2016 were protected by the hold-harmless provision and continue to pay the 2015 standard premium amount of $104.90 per month. Higher-income retirees, who are not protected by the hold-harmless provision, pay $170.50, $243.60, $316.70 or $389.90 per person in 2016 depending on their income levels.
“I pay for Medicare at the standard rate of $121.80 per month because my income has typically been below $85,000 annually,” the reader wrote. “But in 2016 my income will spike to over $150,000, before dropping back below $85,000 again in 2017,” he explained. “Would it be wise to go ahead and begin claiming Social Security when I turn 66 in October to be protected from a Medicare hike?”
The reader, who asked to remain anonymous, said his full retirement age benefit at 66 is about $2,000 per month. He had planned to wait until 70 to collect a maximum benefit of about $2,640 per month including four years of delayed retirement credits.
By waiting until 70 to claim Social Security, his annual benefits will increase by nearly $7,700 per year and provide a larger base for future cost-of-living adjustments. To put that income boost into perspective, it would cost more than $100,500 invested in a deferred-income annuity today to produce $7,700 of annual income beginning at age 70, according to an annuity calculator.
I told the reader he should stick with his original plan of delaying his Social Security until age 70, assuming he is reasonably healthy and has other income or assets to rely on in the meantime.
“Medicare premiums are reset every year and the amount you pay is based on your latest available tax return,” I told him. “In 2017, your Medicare premium will be based on your 2015 tax return that you filed in 2016. Although you would be protected from a premium increase next year if you started collecting Social Security this year, you would lose that protection the following year because your 2016 income would exceed the $85,000 threshold.”
For those not protected by the hold-harmless provision, Medicare Part B premiums could increase by as much as 22% next year, raising the base amount by about $36 from $121.80 to $149 per month in 2017, according to the Medicare Trustees report. The government will announce 2017 Social Security COLA and Medicare premiums next month.
Advisers faced with the same question should weigh the increased costs in Medicare premiums against the much larger increase in Social Security benefits if clients delay claiming until age 70. And advisers should also remember that clients whose MAGI exceeds the $85,000/$170,000 thresholds will never be protected from annual Medicare Part B increases.
Looking ahead, it's a good time to warn higher-income clients that their Medicare premiums may increase even more in 2018 when new income brackets go into effect, and that those new brackets will be based on 2016 tax returns.
(Questions about new Social Security rules? Find the answers in my new ebook.)
Mary Beth Franklin is a contributing editor to InvestmentNews and a certified financial planner.