As a result of low inflation during the past year, it appears that there will not be a Cost of Living Adjustment (COLA) applied to 2015 Social Security Benefits for the 2016 year. This is only the 3rd time in the past 40 years this has occurred. Because there will be no 2016 COLA, it enacts an obscure provision in the Medicare laws which prevents Medicare premium increases in a year in which there is no COLA. However, Medicare is required to pay for a part of its funding through beneficiary premiums. This means that approximately 70% of Medicare beneficiaries will be “held harmless” and will not experience a premium increase. However, the other 30% made up of non-exempt beneficiaries and new enrollees will endure all of the premium increases.
For tax year 2014, those whose modified adjusted gross income (MAGI) is greater than $85,000 filing as individuals or $170,000 filing as couples do not fall in the “hold harmless category” and are subject to premium surcharges on a graduated scale from 42 percent to more than 200 percent (see below chart). Others not protected by the hold-harmless rule include those who do not have Medicare Part B premiums deducted from their Social Security benefits. This includes individuals who are delaying Social Security benefits even if they are enrolled in Part B — e.g., many who elect to delay or “file and suspend” their Social Security benefits. Those individual’s Medicare Part B premiums may increase regardless of family income.
These are huge premium increases, and we recognize that this will have a major impact on many of our client’s annual medical spending. The good news is that the Medicare Trustees anticipate this increase to be a one-year phenomenon with premiums returning to a normalized level in 2017. However, we anticipate that increases in Medicare premiums will rise faster than COLA increases provided by the Social Security Administration over the coming years. For this reason, we plan with our clients for medical costs rising faster than broad market inflation to ensure that they will have adequate spending power necessary to maintain a high level of medical care. If you have questions about your own Medicare coverage, let your advisor know. Medicare is an important part of every retirees financial plan.
Daniel Johnson III, CFP®