Tuesday, January 19, 2010

Social Security/Medicare Conflict

From this morning's Wall Street Journal. Good illustration of how tricky this financial planning can be.

* JANUARY 14, 2010

Medicare Costs More—for Some


Some Medicare beneficiaries are finding their 2010 premiums—which they thought would be frozen at 2009 levels—are actually jumping 15%.

The hike affects individuals who have heeded the advice of experts and waited to claim Social Security benefits until they reach full retirement age, as the federal government defines it.

The increase results from a little-noticed intersection between rules governing Medicare and Social Security, two of the country's largest entitlement programs.

Under the Social Security Act's "hold harmless" provision, Medicare can't pass along to Social Security recipients a premium hike that's higher than whatever they would receive through Social Security's annual cost-of-living adjustment, according to Mark Lassiter, a Social Security Administration spokesman in Washington, D.C

With no Social Security increase expected for 2010, Medicare can't charge beneficiaries who are also Social Security recipients any extra premium.

The Department of Health and Human Services sets the standard premium each year for Medicare Part B, which mainly helps pay for doctor visits and other outpatient treatment. Premium revenues are supposed to cover about 25% of the average cost of Medicare Part B services incurred by enrollees age 65 and older.

Of the 42.3 million Americans covered by Medicare Part B, some 73% also receive Social Security—meaning the remaining 27% of Medicare beneficiaries must make up the difference by paying higher premiums.

"The Part B premium increase is higher than it would otherwise be because the costs are spread across a smaller share of beneficiaries," according to a Kaiser Family Foundation report.

The affected beneficiaries include the 3% of Medicare Part B recipients who are celebrating their 65th birthday this year, along with the 2% who haven't started collecting Social Security yet mainly because they haven't reached their "full retirement age"—the age at which older adults can receive 100% of the Social Security benefit to which they are entitled. For people turning 65 in 2008 through 2019, full retirement age is 66.

Dave Weber, a 65-year-old part-time consultant from Scottsdale, Ariz., enrolled in Medicare last year but postponed Social Security in order to get a higher monthly check at some future point. Now, he feels he is being unfairly penalized for this decision.

While retirees collecting Social Security were spared, his Part B premium is rising to $110.50 a month from $96.40. "My annual income—from a small pension, investment income and some part-time consulting—is only enough to put me in the 28% federal tax bracket," Mr. Weber says. "It's not like I'm in a high income bracket."

Richard Braden, 66, was laid off in 2008 but delayed signing up for Social Security until his 66th birthday, in December 2009. "I was trying to do what was right for myself and my family and wait to get my full benefit," he says.

Mr. Braden wasn't on the Social Security rolls in November, as required to be covered by the "hold harmless" provision, and so he must pay the higher Part B monthly premium this year. "It really bothers me that I'm being penalized for waiting," says the Tomball, Texas, resident, whose family lives on savings and his wife's salary.

The inequity is expected to extend into 2011. With no Social Security cost-of-living adjustment anticipated for next year, Medicare has estimated that some Part B premiums could increase an additional 9% to at least $120.20 a month.

Assuming that Social Security payments increase in 2012, Part B premiums for everyone would reset at $111.50 (or more for higher-income enrollees).

Last year, HHS supported a bill that would have eliminated the higher premiums for Part B enrollees not covered under the "hold harmless" provision. The bill passed in the House but stalled in the Senate.

Such enrollees include both higher-income individuals who are subject to larger monthly premiums, and lower-income enrollees whose premiums are paid by Medicare and Medicaid, the state- and federal-funded health program for the poor.

Orlando Ortega, 74, was paying monthly Medicare Part B premiums of $250.50 a month for his wife and for himself (their modified adjusted gross income, including tax-exempt interest income, exceeds the $170,000 annual threshold after which married couples pay higher premiums).

With the additional increase, the Fullerton, Calif., couple will each see their monthly premium rise to $287.30 this year. "Those whose income exceeds the threshold are being penalized twice," says Mr. Ortega.

In the past, the "hold harmless" provision affected a much smaller portion of Social Security recipients because there was a cost-of-living adjustment. It was relatively low, and so the "hold harmless" provision applied to a smaller number of Medicare Part B enrollees, Mr. Lassiter says.

For example, someone getting $500 a month in Social Security in a year with a 1% cost-of-living adjustment—for an additional $5 a month—wouldn't have to pay more than $5 a month in additional Medicare Part B premiums if the cost were to increase.

This year "is the first time it has touched so many people," Mr. Lassiter says. As for those who are deferring their Social Security benefits, Mr. Lassiter says even though they are on the hook this year for an additional $169.20 in Medicare premium payments, they can still take comfort.

"They're increasing their benefits each year," he says. "I would imagine that trade-off is still advantageous to them."