High-income retirees could see net benefits decline as their Medicare premiums rise
It looks like Social Security recipients will not see a cost-of-living adjustment (COLA) in their benefits next year. And some high-income retirees may actually see a net reduction in benefits in 2016 as their Medicare premiums, which are deducted from monthly Social Security payments, continue to rise.
The Social Security Administration will make official announcement about the 2016 COLA — or lack thereof — in October. That should give you plenty of time to get ready for some unhappy clients come January when they ask you — their financial adviser — why their Social Security benefits went down.
Beginning in 1975, Social Security benefits began receiving automatic cost-of-living adjustments each year so beneficiaries' buying power could keep pace with inflation. Before that, it took congressional action to increase benefits.
Over the years, the method of calculating that increase has changed. Since 1983, COLAs have been based on increases in the Consumer Price Index for urban wage earners (CPI-W) from the third quarter of the prior year to the corresponding quarter of the current year.
Due to slowing inflation over the past year, the CPI-W during the first two quarters of 2015 has actually declined from a year ago. So unless inflation surges during the remainder of the summer, it is unlikely that the third quarter of 2015 will surpass the third quarter of 2014. Translation: It doesn't look like there will be an increase in Social Security benefits for 2016.
The projection of a 0% COLA for 2016 was echoed in the recently released Social Security and Medicare Trustees report for 2015.
For clients who have been retired for several years, it will be like déjà vu all over again. Similar no COLA years occurred in 2010 and 2011 — the only two times since automatic COLAs were instituted in 1975 that Social Security recipients received no bump-up in benefits. Those two years of no COLAs was followed by a 3.6% hike for 2012, and more modest increases of 1.7% in 2013, 1.5% in 2014 and 1.7% in 2015.
It may give your clients some solace to note that Social Security trustees project a 3.1% COLA for 2017 — but that's a long way off and a lot can change between now and then.
HOW MEDICARE FITS IN
Normally, Medicare Part B premiums are deducted from monthly Social Security benefits. In 2015, most Medicare beneficiaries pay $104.90 per month for Medicare B, which covers outpatient services and doctor visits. Medicare A, which covers hospitalization, is free.
High-income retirees — individuals with a Modified Adjusted Gross Income over $85,000 or married couples with a combined MAGI of $170,000 or more — pay higher monthly premiums for both Medicare B and the Medicare D prescription drug program, and in some cases, a lot more. MAGI includes annual adjust gross income plus tax-free interest.
There are five Medicare premium brackets. In 2015, the surcharges range from $42 to $230.80 per month on top of the standard $104.90-per-month premium. These premiums apply per person, so married couples where both spouses are Medicare age would pay twice as much. The income is based on your latest tax return, so a 2014 tax return filed in 2015 will be the basis for the Medicare premiums paid in 2016.
The 2015 Trustees report projected a 52% increase in Medicare Part B premiums for 2016. The actual increase will be announced by the Department of Health and Human Services in the fall.
If there is an increase in the Medicare Part B premium, only some people will pay it. That's because the Social Security Act contains a “hold harmless” provision that protects the vast majority of Social Security beneficiaries from paying a larger increase in Medicare Part B premiums than they receive in Social Security COLA increase in order to avoid a reduction in their net Social Security benefit.
No increase in Social Security benefits means no Medicare premium hike for most beneficiaries.
But there is an exception to the hold-harmless provision, and it is likely to affect many high-income advisory clients. Anyone who is subject to Medicare premium surcharges is not protected from Medicare increases. Neither are individuals who are newly entitled to Social Security in 2016 or those who are enrolled in Medicare but who have not yet started to collect Social Security benefits.
Bottom line: Many of your older clients may find that their Medicare premiums go up next year while their Social Security benefits hold steady, resulting a net decline in their monthly retirement income.
No COLA increase for 2016 would mean that the taxable wage base would remain at $118,500 for most workers next year. However, the 1.45% Medicare portion of the payroll tax would continue to apply to all wages, even those above the wage base amount, and the 0.9% Medicare surtax would be added for workers with earnings over $200,000 for single filers and $250,000 for joint returns.
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