Recent rule changes to boost retiree health costs

Individually, recent updates to Medicare and Social Security rules may not have seemed like a big deal. But when taken together, seven changes to Medicare means testing, Social Security cost-of-living adjustments (COLAs) and Social Security claiming strategies will increase health care costs and reduce the value of benefits for current and future retirees, according to a new analysis.

“Taken on their own, each of these relatively low-profile changes to Social Security and Medicare have not generally been considered particularly significant or were believed to impact only wealthy Americans,” said Ron Mastrogiovanni, founder and CEO of HealthView Services. “In this report, we show their collective financial impact on individual retirees’ budgets and why retirees should anticipate the continued reduction in the value of benefits and increases in their costs.”

“Financial advisers need to be aware of these law changes and how it impacts individual clients,” said report co-author Michael Daley, the product market manager for HealthView Services, a firm that provides health care cost-projection software to financial services firms and insurance companies.

In February, the Bipartisan Budget Act of 2018 added a new, sixth Medicare means-testing bracket to the existing five income brackets. The new top bracket will increase premiums for individuals earning more than $500,000 and couples with joint income above $750,000 starting next year.

Although this new high-income threshold will affect very few retirees, a more fundamental change was introduced in the same legislation that will delay the implementation of indexing all the income brackets to inflation by eight years, until 2028.

As income grows over time, more future retirees will have to pay surcharges that could significantly increase Medicare Part B and Part D premiums. The paper shows a 38-year-old couple, each earning $45,000 per year, will have to pay an additional $218,000 (in today’s dollars) in lifetime Medicare surcharges in retirement. If the brackets were indexed beginning in 2020 as originally planned, the couple would have faced no surcharges, the paper found.

The new law comes on the heels of previously approved changes to some of the existing Medicare surcharge brackets that took effect on Jan. 1. Those changes shifted some retirees into higher surcharge brackets for Medicare Part B, which covers outpatient services, and Part D prescription drug plans, even though their income was unchanged.

Medicare premium surcharges apply to individuals whose modified adjusted gross income exceeds $85,000 and married couples whose joint income tops $170,000. Medicare premiums for 2018 are based on 2016 income tax returns.

For a 40-year-old man earning $93,000 today who receives an average annual salary increase of 3% until retirement at age 65, the change in brackets will lead to an additional 55% surcharge on Parts B and D, totaling $57,000 in today’s dollars, the report said.

The report also outlines the financial implications of changes over the last three years to Social Security COLAs and the impact of the “hold-harmless rule” that protects most retirees from higher Medicare premiums in years where there is little or no increase in Social Security benefits.

The flip side of that hold-harmless protection is that when Social Security benefits do increase, Medicare premium hikes can virtually wipe the benefit increase, as occurred this year.

Most retirees who received no increase in Social Security benefits in 2015 and a measly 0.3% increase in 2016 saw little or no increase in their Medicare premiums during that period. But the 2% COLA they received in 2018, which averaged about $27 per month, was eaten up by a $25-per-month hike in Medicare premiums this year. As a result, an average 68-year-old couple receiving their first significant Social Security increase in two years in 2018 will spend 96% of their additional COLA benefit on readjusted Part B premiums.

The report estimates that the elimination of the “file-and-suspend” Social Security claiming strategy and the phaseout of the “restricted claim for spousal benefits” strategy for people born after Jan. 1, 1954, would cost an average 58-year-old couple $37,000 in potential lost benefits in today’s dollars.

“Given the pressure on the Medicare and Social Security trust funds from increased longevity and greater numbers of retirees, we can expect ongoing adjustments to these programs,” Mr. Mastrogiovanni said. “As this paper reveals, in combination these small changes will have a big financial impact.”

What’s the takeaway for financial advisers? “People are becoming far more astute and expect their advisers to help them prepare for and adjust to these changes,” Mr. Mastrogiovanni said. “It’s a real value-added service to show clients how their holistic advice sets them apart from robos who are merely picking investments from a set of indexes.”