Bad news from HealthView Services highlights the combined financial impact of recent changes to Social Security and Medicare that will increase future health care costs and reduce retiree benefits in a new white paper. The paper shows that an average healthy 55-year-old couple earning a combined $140,000 today will, at retirement in 10 years, see a projected total impact of $158,000 in today’s dollars, the result of $122,000 in higher surcharges and the loss of over $36,000 in potential lifetime Social Security benefits.
The new HealthView Services report, “Why Recent Updates to Medicare and Social Security Matter“, details the bottom-line implications for retirees of seven changes to Medicare Means Testing, Social Security Cost of Living Adjustments (COLAs), and Social Security claiming strategies, the most recent of which were implemented in January and announced in February 2018.
“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 only believed to impact wealthy Americans,” said Ron Mastrogiovanni, Founder & 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.”
Among the changes that have quietly passed under the radar are those to income thresholds at which Americans will be subject to Medicare surcharges. As of February 2018, in the Bipartisan Budget Act of 2018, a new sixth means testing bracket was added to the existing surcharge brackets. This increases the surcharges for those earning more than $500,000 in Modified Adjusted Gross Income.
Although this will impact very few retirees, a more fundamental change introduced at the same time was a delay in the implementation of indexing these brackets to inflation from 2020 to 2028. By postponing indexing for eight more years, as income grows over time more Americans will have to pay surcharges which will increase Medicare Part B and Part D premiums by an average of 36 to 203 percent. This will impact many future retirees. The paper shows a 38-year-old couple each earning $45,000 will have to pay an additional $218,000 (in today’s dollars) in lifetime Medicare surcharges in retirement. If the brackets were to have been indexed as planned in 2020, the couple would have faced no surcharges.
The February changes follow the lowering of Medicare surcharge brackets three to five, which took effect on January 1, 2018. These changes were part of the 2015 “Doc Fix” legislation passed by Congress. As a result, some individuals moved from the third into the fourth bracket, and all fourth bracket beneficiaries moved into the fifth bracket, increasing the surcharges they would have to pay.
For a 40-year-old man currently earning $93,000 today, who receives an average annual salary increase of 3% until retirement at 65, the change in brackets will lead to an additional 55% surcharge on Parts B and D. This will amount to an increase in projected surcharges of $57,000 in today’s dollars ($173,000 in future value). This assumes surcharges will never be indexed to inflation. What’s more, with a two-year look-back policy, for those currently impacted by the changes to income brackets, they will be assessed on 2016 income, rather than 2018 income.
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”. With a zero COLA in 2015 and 0.3% increase in 2016, it notes the limited benefit to retirees from the 2% COLA increase in October 2017. Although many retirees had previously been held harmless from the rise in Medicare Part B premiums, the increase in COLA meant they are now subject to these higher costs.
Putting this in context, 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 (over $510 in 2018) on readjusted Part B premiums.
The report notes that the effective elimination of the “File & Suspend” and “File Restricted” Social Security strategies in 2016, will cost an average 58-year-old American couple $37,000 in today’s dollars ($72,000 future value) in lost potential benefits.
“Given the pressure on the Medicare and Social Security Trust Funds from increased longevity and greater numbers of retirees, we can expect on-going adjustments to these programs,” added Mastrogiovanni. “Retirees should expect to see more incremental changes to reduce the value of benefits and increase costs. As this paper reveals, in combination, these small changes will have a big financial impact.”
HealthView Services draws upon 70 million health care cases, actuarial, government and economic data to project retirement health care costs. The firm’s rigorous bottom-up approach integrates specific variables – including health status, age, gender, income, and state of residence – that will drive future health care costs. The final calculations draw upon and are consistent with, government health care inflation forecasts.
HealthView Services (http://www.hvsfinancial.com) is the leading provider of retirement health care cost data, Social Security optimization, and long-term care retirement planning tools for financial advisors. HealthWealthLink, the company’s signature service, is an integrated retirement planning tool that assists financial advisors in preparing personalized estimates of retirement health care costs and associated strategies designed to achieve clients’ retirement goals.