Last year’s COLA headache is likely to return this fall
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Bill – Ga.: Two years ago I filed and suspended and was paying my Medicare Part B premium directly every three months. So at the end of 2015, I was not protected by the “hold harmless” provision of Social Security, and my premiums increased from $104 to $121. I read that there will be another Medicare premium increase in 2017. It was my understanding (after the fact) that I could file to receive my Social Security retirement benefit for the last few months of the year, get my Medicare premium deducted from those payments, be held harmless for the next year’s increase and then once again suspend in 2017 to allow my retirement benefit to once again continue to grow by 8 percent a year. My wife is receiving a spousal benefit based on my earnings while her own retirement benefit also continues to accrue at 8 percent a year. Would her benefit be affected by the steps outlined above?
Phil Moeller: Bill’s question dredges up last year’s mind-numbing benefits mess, which was connected to what’s called the “hold harmless” rule. In looking into this situation anew, it turns out that last year’s problems actually may be surpassed this year. Lucky us!
With as much brevity as I can muster, the rule says that Social Security benefits cannot be reduced from one year to the next. This is normally no big deal. But anyone on Social Security and Medicare must, by law, have their Medicare Part B premiums (which insure doctor and other outpatient expenses) deducted from their Social Security payments. Again, this is normally not a problem. If Medicare premiums rise, they are simply paid out of higher Social Security benefits once the program’s annual cost of living adjustment, or COLA, takes effect.
The wheels started falling off this wagon last year, because there was no consumer price inflation and thus a zero COLA for 2016. For the time being, let’s put aside whether there was really no consumer price inflation. As seniors and others with lots of medical expenses know, there sure as heck was price inflation last year. But the COLA is based on consumer prices in urban areas, and there was no increase in this measure.
Medicare expenses and premiums continued to rise, however, and Medicare is required by law to collect about 25 percent of Part B program expenses from Medicare policyholders. Because 70 percent of Medicare beneficiaries were receiving Social Security and thus held harmless, the agency had to try and collect all higher beneficiary premiums from the other 30 percent. This group includes people like Bill who did not have their premiums backed out of their Social Security payments. It also includes people who were new to Medicare in 2016. Certain higher-income Medicare beneficiaries, who pay income-based premium surcharges, are also not held harmless. Many poorer people aren’t held harmless either. They usually don’t pay Medicare premiums, so these higher expenses are borne by government.
These folks initially faced 2015 Part B premium increases exceeding 50 percent — what a mess! Eventually, Congress stepped in and floated a $7.5 billion loan to Medicare. This limited the blow to folks not held harmless, although they still faced a 2016 Part B premium increase of about 15 percent. What a smaller mess!
Under then-existing Social Security rules, it turns out there was a workaround. Bill has described it accurately. A person on Medicare but not receiving Social Security could file for retirement for a couple of months, have benefits paid to them for November and December of 2015 and have their Part B premium backed out in December (there’s a one-month lag between initiating retirement benefits and paying Medicare premiums). This would qualify them to be held harmless for all of 2016. Then, early in 2016, they would suspend their Social Security benefits and still enjoy being held harmless the rest of the year.
And now, I’m going to take a side excursion into the benefit weeds and will don my special pair of regulatory hip waders.
During the period when they were receiving benefits, people who use the technique Bill describes would not earn what are called delayed retirement credits from Social Security. Between a person’s full retirement age — now 66, but scheduled to rise to 67 — and age 70, delayed retirement credits accrue at the rate of 8 percent a year for people who have not claimed Social Security retirement benefits. This can be an attractive reason to delay taking Social Security, and as readers of our Social Security book know, I am a strong supporter of delaying Social Security in many circumstances.
However, each month benefits are received during this period, a person will lose two-thirds a percentage point of their delayed retirement credits (for the math-challenged like me, an 8-percent annual delayed retirement credit works out to two-thirds of a percentage point each month). I mention this because taking benefits for, say, three months before suspending them again would work out to a delayed retirement credit loss of 2 percentage points. For higher earners, this easily could amount to 2 percent of $3,000 or even more every month for the rest of one’s life. This loss needs to be weighed against the lower Part B premiums that such a technique permits, keeping in mind that these premium adjustments are temporary. Once COLAs return to positive territory, Part B premiums will be adjusted so that most people not held harmless would eventually pay the same premium as those who were. Are we totally confused yet?
Bill also is correct that most forecasts see a zero or very small COLA once again for 2017. And, of course, Medicare Part B expense increases are also still part of the equation. So last year’s mess is likely to be repeated. The 2016 Medicare Trustees’ report projects only a 0.2 percent COLA for 2017. This increase would be far outstripped by higher projected Medicare expenses, thus triggering the hold harmless rule. And here’s where matters get even more interesting and confusing.
If the COLA for 2017 was once again zero, premiums for most people would pretty much remain the same. People held harmless this year would continue paying $104.90 a month for their Part B premiums. People who were not held harmless and had to pay $121.80 a month would still pay this amount. And there would be a new group of people not held harmless who would pay a higher amount.
But if the COLA actually increases near the projected amount, this will not happen. As a result, people will find themselves paying different amounts for Part B premiums. Here’s how it will work:
People now held harmless and paying $104.90 a month would still be held harmless. Their monthly Social Security payment would stay the same, and their tiny COLA would be paid out as higher Part B premiums. Based on average Social Security monthly retirement benefits, the Part B premium for these folks would rise by $2.70 a month, from $104.90 to $107.60, explains Dan Adcock, director of government relations and policy for the National Committee to Preserve Social Security & Medicare. But the actual amount of the Part B increase would be 0.2 percent of a person’s actual monthly Social Security payment.
So if you thought last year was confusing, wait until next year! The implication of a 0.2 percent COLA (or, in fact, any COLA that is smaller than Part B premium increases) is that people’s Part B premiums would no longer be the same. Based on Adcock’s projections, the $2.70 average monthly Part B premium increase would only be paid in reality by someone earning the average monthly Social Security benefit of about $1,350 a month. People with smaller benefits would face smaller Part B increases and those with larger benefits would pay more. Last year’s smaller mess would become a much bigger mess!
And it will be made bigger or at least more confusing still, because the group not held harmless last year has been paying monthly Part B premiums this year of $121.80. Many of them will now join the hold harmless group for 2017, meaning their Social Security payments cannot be decreased. So all of their 0.2 percent COLAs also would go to higher Part B premiums. But these, too, would be linked to specific monthly benefits, meaning that this group’s 2017 Part B premiums would be $121.80 a month plus 0.2 percent of their actual monthly Social Security benefit.
Do you think this will be unbelievably confusing? You betcha!
Lest we forget, there will be a new group of 30 percent of beneficiaries who will not be held harmless next year. Adcock says their projected Part B premiums would jump more than 22 percent from $121.80 to $149 a month. Congress would not like this any more than it did last year, he notes. But providing another one-year fix is likely the best we can do. Even here, however, the outlook is dicey.
When the official 2016 COLA was announced last October, Congress was still in session and could move with relative speed to enact a fix for this year. When the 2017 COLA is announced next month, Adcock says, Congress will not be in session, but will be in the thick of the 2016 election campaign. Any fix must occur after the elections. This delay will, among other things, create a lot of headaches for the Social Security Administration, which must program any changes into its computers and 2017 benefits process.
But to answer Bill’s question, what he proposes would, in fact, be acceptable, according to a Social Security spokeswoman. However, it would have an adverse impact on his wife’s spousal benefits.
Even with last year’s major changes to Social Security claiming rules, a hold harmless workaround is still possible, the spokeswoman said. If someone is not collecting benefits, but is entitled to them and has reached their full retirement age, they could claim benefits beginning no later than this November. Then they can suspend them again early next year. They would be held harmless for all of 2017, but as noted above, they would lose their delayed retirement credits for those months when they are receiving benefits.
However, under terms of the Bipartisan Budget Act of 2015 (the law that changed Social Security), if Bill files for his benefits for a few months and then suspends them, his wife would not be able to claim her spousal benefit as long as his benefit was suspended. “No auxiliary benefits (except divorced spouse’s benefits) may be paid on the record of a number holder (NH) who requests voluntary suspension,” the spokeswoman said via email.
I’d think as a practical matter this would make the workaround a nonstarter for Bill. But it might not be for someone whose earnings are not the basis for someone else’s benefits.
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