We all know in 2016 those receiving Social Security benefits
won't see a Cost Of Living Adjustment (COLA) in 2016. We can debate whether the Cost of Living is rising due to inflation, but Uncle Sam doesn't see it. While the lack of a COLA is bad for the vast majority of Americans, many may actually experience a decrease in their net Social Security benefits due to the vastly misunderstood workings of Medicare.
There are variety of moving parts to this scenario, so let's look in the simplest terms.
The first thing to understand is that Medicare, regardless of what politicians may say, is already "means tested." Those with higher incomes pay more for their Part B and Part D premiums than those with lower incomes. The second thing is the term "hold harmless." While it sounds like a good thing, it has far-reaching and unintended consequences.
In terms of Medicare premiums
, the term refers to federal law, which dictates that in years when there is no Social Security COLA, there can be no premium increases. This would affect the net amount a retiree would see in their Social Security benefit. Great, right?
Not so fast...
There is a certain unprotected class of Americans where this doesn't apply. The Wall Street Journal
reported that "Medicare would be unable to pass any premium increase along to the estimated 70 percent of beneficiaries who will qualify for this “hold harmless” treatment in 2016. As a result, Medicare must spread the projected increase in its costs across the remainder," and "3.1 million participants subject to higher Part B premiums because their incomes are above $85,000 (or $170,000 for couples)." Unfortunately, this isn't where the problem ends.
While they may not see the effects in 2016, the first Baby Boomers will turn 70 in January, and as a result will be subject to Required Minimum Distributions (RMDs) from their retirement accounts next year. This extra income will push more Americans into the non "hold harmless" category affecting them in 2017 and beyond. Making matters even worse is what The Wall Street Journal
doesn't mention: The fact that the current income threshold is expected to be lowered to point where 25 percent of all American retirees are caught in the net.
As that number decreases, and more Americans (i.e. your clients) will be paying higher costs for health care in retirement, how will they deal with the affect of potentially lower NET retirement income? Perhaps most importantly, how will higher health care expenses impact the typical retirement income plan?
Call it what you will, but once the government has it's way, and 25 percent of all retirees are outside the "hold harmless" category, we see this potentially as essentially a hidden tax for an expanding number of retirees. There are ways to mitigate some of the risks associated with this scenario, but, unfortunately, the vast majority of the financial services industry isn't interested in discussing health care in retirement with their clients
Hopefully, you don't fall into that category.