The Social Security Medicare penalty
Social Security recipients get a cost of living adjustment each year. That increase is based on the overall economic inflation rate. Most people would measure inflation by the CPI, or Consumer Price Index.
I’m often asked if Social Security increases will keep up with inflation. So often in fact that I’ve done studies on this. To most retired folks surprise the Social Security inflationary raises are quite accurate.
Most retiree’s Medicare payment comes straight out of their Social Security check. Medicare costs are rising at a torrid rate as well. If your Medicare premiums rise faster than the SS COLA, you could experience a net reduction in your Social Security income!
How does this Social Security Medicare penalty work?
Under Social Security and Medicare rules there is a “Hold Harmless” provision. This rule is intended to protect Social Security recipients from a reduction in their Social Security payment due to a higher than inflation rate rise in Medicare Part B premiums. It states that the dollar amount of the increase in Medicare Part B premiums cannot exceed the dollar amount of the Social Security cost of living adjustment.
Under the Hold Harmless provision at worst your Social Security check should remain flat. It doesn’t however protect you from faster than inflation increases in Part D premiums. Higher Part D premiums could actually reduce your net Social Security check.
The “Hold Harmless” provision sounds good, right?
Here’s the problem. The Hold Harmless rules only apply to about 70% of Medicare enrollees. That means that roughly 30% of Medicare participants have to pay for the increase in Medicare Part B premiums. Not just their individual burden of Medicare increases, but a shared burden of the entire pool of Medicare recipients who won’t face an increase.
It doesn’t seem fair if you’re one of the 30% of Social Security recipients affected by this. Nonetheless, it’s a fact of life!
No inflation feels great unless you’re hit with the Social Security Medicare penalty
There is effectively little to no inflation right now. That means there’s likely no Social Security 2016 cost of living increase for recipients.
Healthcare costs are rising faster than the rate of inflation. The same is true for Medicare Part B costs, they’re rising faster than inflation as well.
Since there’s little to no inflation the entire increase in Medicare Part B costs will be paid pro rata by the 30% of enrollees which aren’t protected under the Hold Harmless provision. That Medicare Part B cost increase is projected to be a whopping 52% for them!
To put the 52% spike in Medicare Part B premiums in perspective, it’s about $55 a month. That $55 a month equates to $650 a year! This is a big chunk of money for a lot of retirees.
So who are these 30% of Social Security recipients?
- Those delaying benefits – Social Security eligible people who are delaying their Social Security benefits (to earn the additional 8% per year) will be hit. If you have implemented a “File and Suspend” strategy, you’re generally doing the smart thing to get that extra 8% increase per year. The unfortunate part is your Medicare Part B costs are going to jump dramatically.
- Eligible but not enrolled – Another chunk of that 30% not protected by the Hold Harmless provision is those who COULD enroll in either Medicare or Social Security, but haven’t yet.
- Rich people (by government standards) – High-income taxpayers who are subject to the Medicare Part B premium surcharge cannot protect themselves from the premium spike at all.
What does the penalty mean to you?
You should very seriously consider whether delaying Social Security benefits is the right move for you. If you’re seeking the delayed retirement credits (that 8% bump), how does your share of the 52% spike in Medicare Part B premiums affect you financially? Is it worth it to delay SS?
Generally the answer is yes! If you’re delaying your Social Security payments to enjoy the 8% delayed retirement credits, the value of those credits should far outweigh the Medicare Part B premium spike. This is assuming you live past the breakeven period for your delayed SS strategy to pay off.
If you absolutely want to be protected from the Medicare Part B spike, you have about a month to plan around it. The Hold Harmless provision is based on whether you’re getting SS benefits the last two months of this year. If you’re currently delaying benefits, you may want to start taking them as soon as possible!