Buried in the recent Social Security and Medicare Trustees' Report were some hints about next year's projected cost-of-living adjustments for Social Security benefits and likely increases in Medicare premiums for 2020.
The fact that the Medicare Part A hospital insurance trust fund is expected to be depleted in 2026 unless Congress acts before then stole the headlines. But the report also revealed that the basic Medicare Part B premium, which helps pay for doctors' fees and outpatient services, is expected to increase by $8.80 to $144.30 a month in 2020. And more people are likely to pay high-income surcharges, officially known as income-related monthly adjustment amounts, or IRMAA, next year.
In 2018, approximately 3.7 million high-income Medicare beneficiaries, defined as individuals with modified adjusted gross income above $85,000 and married copies with combined MAGI over $170,000, paid IRMAA surcharges. Many of those people are advisory clients, and they often have questions about why they are paying more for Medicare and whether they can do anything to reduce their future health-care costs.
Medicare surcharges are based on the last available tax return, so 2019 premiums are based on 2017 federal tax returns that were filed in 2018. Medicare premiums and surcharges are normally deducted directly from Social Security benefits.
There are six income tiers that determine Medicare surcharges. Currently, most retirees pay $135.50 per month for Part B premiums, but IRMAA surcharges range from $189.60 to $460.80 a month per person. High-income beneficiaries also pay an additional monthly surcharge for their prescription drug plans ranging from $12.40 to $77.40 a month on top of their monthly Part D premiums, which vary widely but average about $32 in 2019.
Initially, there were five income tiers that determined premium surcharges. The income tiers, first imposed in 2011, were never indexed for inflation. But that will change starting next year, which means more retirees may be subject to the IRMAA surcharges in 2020, the report said.
A new, sixth tier for very high-income retirees with individual incomes topping $500,000 and married couples with joint income exceeding $750,000 was added in 2019. The new top thresholds will not be indexed to inflation until 2028, the report said.
In addition, the trustees' report projected that the Social Security cost-of-living adjustment will increase by a modest 1.2% in 2020 — less than half the size of this year's COLA. A 1.2% COLA would increase the average retirement benefit by about $17 to $1,478 a month in 2020 and boost the maximum benefit for someone who retires at the full retirement age next year by about $34 to $2,895 a month. The 2020 COLA will be announced in October.
"A very low COLA would increase the risk that higher Medicare Part B premiums for 2020 will consume the entire amount of the COLA for millions of low-benefit Social Security recipients," said Mary Johnson, a Social Security and Medicare policy analyst for The Senior Citizens League advocacy group.
Even though Social Security recipients received a 2.8% COLA this year — the highest since 2012 — the inflation adjustments have averaged a meager 1.4% over the past decade. There was no COLA in 2016, followed by a 0.2% increase in 2017 and a 2% increase in 2018.
Ms. Johnson forecasts that more retirees will be affected on a recurring basis if COLAs continue to remain low because the Medicare trustees estimate that the basic Medicare Part B premium will grow to $226.30 per month by 2028.
The disconnect between rising Medicare premiums and virtually stagnant Social Security benefits is one of the reasons that health-care costs top the list of retirees' biggest fears.
Health issues are the No. 1 retirement-related concern for adults over 65 (36%), compared to running out of money (16%) and lifestyle (12%), according to the eighth annual Retirement Income Strategies and Expectations survey released by Franklin Templeton last month. In fact, paying for health expenses in retirement is the top expense concern among American adults, regardless of age, and was cited by 41%, compared to paying off debt (16%) and lifestyle (15%), according to the online survey of 2,000 adults.
"In order to address the top retirement concerns so many Americans are facing, it's imperative to incorporate health-care expense planning as part of a holistic retirement savings strategy," said Kevin Murphy, head of strategic accounts for Franklin Templeton's defined-contribution division.
"Health savings accounts are a great example of one of the most efficient vehicles to save for medical expenses in retirement that can complement long-term retirement saving strategy," Mr. Murphy said.