If you’re collecting Social Security benefits, you’re probably well aware that the federal government will not be issuing a cost of living adjustment (COLA) for 2016. It’s the third instance of a 0 percent COLA this decade, and it’s based on an inflation reading of equal number—zilch.
Of course, that’s largely due to the plunge in energy prices. Retirees know better than anyone that other costs are rising. Key among them: health care.
Yes, in a cruel contradiction, Medicare Part B premiums are not staying flat. As in nearly every year prior, they will increase for 2016. All things being equal, that would presume your Social Security check goes down as of Jan. 1, when Medicare goes up.
The good news for individuals with annual income below $85,000 (and couples below $170,000), is that the hold harmless provision will kick in. It essentially says that in years when the Social Security COLA isn’t large enough to cover the Medicare increase, you will not be subject to a higher Part B premium. The government cannot harm you by reducing your benefits from the prior year.
However, for individuals and couples above those income thresholds, the pain will be particularly acute. The Medicare system still has to cover its costs, so the premium increase is larger for those deemed to be higher-income beneficiaries. Some estimates suggest the increase could be greater than 50 percent. Ouch.
These latest developments have me contemplating the increasingly complicated and expensive reality of retiree health care costs. Some remain hopeful that the federal government might have a trick up its sleeve (or just some relief) for the steep hike in Part B. While I profess no magic powers, I will offer the following thoughts and strategies that may help relieve your health care sting, or at least make you a more informed user of the Social Security system.
Four Considerations for Medicare and Social Security
1. CONSIDER UNSUSPENDING
If you have filed and suspended taking Social Security benefits, but participate in Medicare, you may want to consider reinstating Social Security benefits for November and December 2015. Why? Because to qualify for hold harmless, and therefore avoid the increase in your Part B premium, you need to have received a Social Security check in November and December. Be sure to do this by Oct. 31 with an easy call to the Social Security Administration (SSA). You can then suspend your Social Security benefits again beginning in January, and may enter that request at the same time.
2. KNOW YOUR LIMITS
Medicare premiums are determined based on money made for the year. So if you are close to income thresholds that would slot you into a new premium, talk to your accountant and/or financial advisor to see what adjustments you could make to remain in the lower threshold. Perhaps you could sell an investment at a loss or take a distribution from a Roth IRA instead of a traditional plan. Do this after Nov. 15. It’s not going to produce a windfall, but it could limit the Medicare increase you experience in 2017 by keeping you in the same premium bracket.
Consider similar strategies if it might help you stay below the $85,000/$170,000 limit to benefit from hold harmless.
3. BEWARE AN HSA SURPRISE AT 65
November marks the start of annual health care enrollment time for most public and private health plans. It’s also the time when many people revisit or establish a Health Savings Account (HSA). These are a terrific resource for saving and investing to cover medical expenses starting at age 65. Be aware, however, that the rules change once you hit that age. The one that surprises people most: If you are 65 and taking Social Security benefits, you are automatically enrolled in Part A of Medicare. And once you are participating in any form of Medicare, you are ineligible to contribute to an HSA. This is a gotcha that has blindsided more than a few investors with good intentions for covering health costs later in life.
4. KNOW AND USE THE NUANCES
If you’re thinking of retiring prior to Medicare eligibility at age 65, and you find that your health care premiums are expensive, one “unadvertised” option Social Security provides is the ability to take then suspend your checks once you reach full retirement age (FRA). In other words, you could collect Social Security retirement benefits at age 62 to help pay for those pricey health care premiums. Then, once you reach FRA, you can tell the SSA to stop sending those checks and start earning your “raise.” This is a little-known way that you can use your earned benefits to help with higher health care premiums between ages 62 and 65. (Of course, if your FRA is 66, you’d have to collect your retirement benefits for another year before you can suspend.)
Another handy tip: If you end up going back to work after starting to collect Social Security benefits, you have one year to change your mind. Why would you want to do this? Perhaps you are earning too much, such that it lowers or precludes a Social Security check. The government will bill you for the Social Security money you were paid, but you’ll again be able to let your Social Security income grow. This may or may not be the best approach for you, but it’s a consideration worth discussing with your financial advisor, as your checks will be larger the longer you wait.
For more on health care considerations for retirees or those nearing retirement, read my related blog post Health Care: The Stealth Retirement Expense.
Rob Kron, Managing Director, is the head of Investment and Retirement Education for BlackRock’s U.S. Wealth Advisory group. He provides practical information on topics that are important to every saver and investor of every age.