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 The Medicare premium hikes will hit only 30 percent of
beneficiaries: those who are not protected from a “hold-harmless”
provision in federal law that prohibits any premium hike that
produces a net reduction in Social Security benefits. But the
increases suggest strongly that the recent trend of moderate
healthcare inflation is ending.
SOCIAL SECURITY CHANGES
Final figures for 2016 will not be available until the fall, but the
recent annual report of Social Security’s trustees projects that
there will not be any cost-of-living adjustment (COLA) next year.
The COLA is determined by averaging together third-quarter inflation
as measured by the Consumer Price Index for Urban Wage Earners and
Clerical Workers (CPI-W). Inflation has been flat due to collapsing
oil prices.
The forecast underscores the need for a better gauge of the
healthcare inflation that disproportionately affects seniors.
Advocates have argued for years that an alternative, the Consumer
Price Index for the Elderly (CPI-E), would do just that.
If the CPI-E had been in place from 1985 to 2014, Social Security
benefits last year would have been 6.5 percent higher than they are
today, according to an analysis by J.P. Morgan Asset Management.
THE HEALTHCARE FRONT
Healthcare inflation has been quiet lately - annual growth in total
Medicare spending averaged 4.1 percent from 2010 to 2014, compared
with 9 percent from 2000 to 2010 - even though the number of
enrolled beneficiaries rose.
But renewed cost pressures are pointing toward much higher Medicare
premiums starting next year, according to the Medicare trustees’
annual report.
Consider the monthly premium for Part B (outpatient services), which
has stayed at $104.90 for the past three years. The Medicare
trustees projected that the premium will jump 52 percent, to $159.30
for beneficiaries who are not protected by the hold-harmless
provision.
That would include anyone enrolled in Medicare who is not yet taking
Social Security benefits due to a decision to delay enrollment. It
also would include new enrollees in Medicare next year. (The
increase also would be applied to low-income beneficiaries whose
premiums are paid by state Medicaid programs).
High-income retirees - another group that is not protected by the
hold-harmless provision - also will be hit hard if the trustee
projections hold.
Affluent seniors already pay more for Medicare Part B and also Part
D for prescription-drug coverage. This year, for example,
higher-income seniors pay between $146.90 and $335.70 monthly for
Part B, depending on their income, rather than $104.90.
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The Medicare trustees now project that to jump even more.
“When you combine it all, it’s looking pretty ugly,” says Sharon
Carson, a retirement strategist at J.P. Morgan Asset Management.
Higher costs for the affluent look like a trend that could
accelerate further. The recently passed “doc fix” legislation (which
corrects long-standing problems with reimbursement rates to
physicians) shifts a higher percentage of costs to higher-income
seniors starting in 2018.
Seniors with incomes of $133,000 to $160,000 would pay 65 percent of
total premium costs, rather than 50 percent today. Seniors with
incomes between $160,000 and $214,000 would pay 80 percent, as they
do today.
“Congress will probably go back to that well again,” predicts
Carson, and she thinks one possible outcome will be lower income
thresholds.
MORE IMPACT
Medicare premiums are not the only area where seniors may feel the
impact of impending healthcare inflation. The median healthcare cost
for a 65-year-old in 2014 was $4,400, according to recent J.P.
Morgan research; the firm expects those costs to rise at an annual
rate of 6.1 percent over the next 20 years, to $17,000 at age 85
(the costs include Medicare Part B, Part D, and Medigap premiums,
out-of-pocket expenses, and vision and dental services.)
If you want to be prudent in your retirement planning, Carson
advises assuming inflation of 7 percent going forward. Coping
strategies include keeping at least some portion of your portfolio
in equities well into retirement, and taking steps to minimize
ordinary income, with an aim to stay out of the high-income premium
surcharge brackets.
“The common wisdom is to withdraw money from the IRA or 401(k)
last," says Carson. "But doing some of that in the early years - or
doing some Roth conversion - can help.”
(Editing by Beth Pinsker and Jonathan Oatis)
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