Government Fixes Medicare Premiums (Sort Of)
By Michael Kalscheur, CFP®
Senior Financial Consultant, Castle Wealth Advisors, LLC
Most people, when they turn 65, automatically think of filing for Medicare. They do not necessarily consider how much it will cost or how that cost is calculated. It is much more complicated than you might think.
- Medicare Part A is “free,” aka we all pay for it through payroll taxes – 1.45% out of our paycheck + 1.45% match by the employer (2.9% for all self-employed).
- Medicare Part B is charged directly to the recipient or by deducting the premium from Social Security benefits (if claimed). In 2015 these premiums start at $104.90 per month, per person.
- The premium, by law, covers 25% of the costs of Medicare, with 75% of the costs covered by general tax revenue. The base premium has increased 34% over the last 10 years, but premiums don’t increase every year.
- Medicare premiums are only allowed to increase when Social Security increases; this is due to the “Hold Harmless Provision.” However, not everyone is covered by this provision. First time enrollees, people who have deferred Social Security and people with higher incomes (over $85,000 single / $170,000 for a couple) pay higher premiums.
2016 was scheduled for no increase in Social Security, so there is no increase for people covered by the Hold Harmless Provision. However, since the provision covers about 70% of people on Medicare, all of the cost increase falls on the non-covered recipients. This would have increased monthly premiums for non-covered recipients to $159.30 (that’s a 51.9% increase).
This same problem happened back in 2010 and 2011, but the incre ases were closer to $15 or $20 per month (and neither were presidential election years).
Since no politician in Washington wants to face his or her constituents after their Medicare premiums increased over 50%, Congress came up with a solution that only Congress could: they borrowed the money.
The Medicare Insurance Trust Fund will borrow Billions of dolla rs from the Treasury to limit the maximum payment to $121.80/month, an increase of $16.90/month. This loa n will then be paid back with a $3 per month “surcharge” on all people not covered by the Hold Harmless Provision. The surcharge will be in place until the loan is paid back. We were unable to find any definitive answer for how long this might be, but it will be at least several years and very well may be significantly longer.
Long story short, here is what Medicare looks like in 2016:
- If you are already enrolled in Medicare Part B, are receiving Social Security, and you are covered by the Hold Harmless Provision, your premium starts at $104.90/month, the same as 2015.
- If you are enrolling in Medicare Part B for the first time or haven’t taken Social Security yet, and your income was under $85,000 single / $170,000 married in 2014, your premium is $12 4.80/month ($121.80 + $3 surcharge).
- If you made over $85,000 single / $170,000 married, there is a sliding scale fo r monthly premiums
|$85,000 - $107,000||$170,000 - $214,000||= $170.50 + $3 surcharge = $173.50|
|$107,000 - $160,000||$214,000 - $320,000||= $243.60 + $3 surcharge = $246.60|
|$160,000 - $214,000||$320,000 - $428,000||= $316.70 + $3 surcharge = $319.70|
|Over $214,000||$428,000||= $389.80 + $3 surcharge = $392.80|
Chances are that there will be an increase in Social Security in 2017, and therefore, an increase to all Medicare Part B premiums. This may cause the gap in premiums to decline or disappear, but nobody knows this yet. Also, the $3 surcharge is here for the foreseeable future.
Michael Kalscheur, CFP®, is a Senior Financial Consultant at Castle Wealth Advisors, LLC. Castle specializes in helping wealthy families and closely-held business owners with strategies to protect and transition family assets from one generation to the next. Castle’s senior partners also work with clients throughout the country in making logical decisions to help them fulfill their personal and business financial goals. For more information visit www.Castle3.com, call 1-888-849-9559 or contact Michael directly at .