Back in 1997, our government began its quest to tackle the unsustainable increase in healthcare spending by enacting legislation which created a formula, aptly titled “the Medicare Sustainable Growth formula”, through the Balanced Budget Act of 1997 (BBA).
This formula was designed to limit the “growth in spending for physicians’ services by linking updates to target rates of spending growth. The law provides for a mechanism for enforcement of the target rate of growth. When spending increases exceed the targeted rate of growth, payments are automatically reduced across the board”.
The issue with this legislation, besides being waived most of the time by Congress, is that it literally caps the amount of money Medicare reimburses healthcare providers. The result is healthcare providers being forced to increase rates on their services to offset the losses they incur from being paid less.
As stated, this formula has usually been waived, but this year Congress is split on what to do. And if nothing is done to either change the law or waive the law, many healthcare providers could possibly see a 21.2% reduction in payments received for their services.
In order to keep the flow of payments steady for health services in the past, Congress has found ways to make cuts in other areas of the Budget. But as you can imagine, this time it’s much more difficult, and Congress is looking at other measures to solve the problem.
And this is where you, especially if you are still funding your employer’s Retirement Savings Account, your 401(k), 403(b), 457 account, or any other personal “tax deferred” vehicle, should sit up and take notice.
One of the possible solutions in waiving this SGR formula and still being able to afford it is by, according to Modern Healthcare, increasing the “cost-sharing for wealthier Medicare beneficiaries”.
So what’s the problem, since this will only impact those “wealthy Medicare” people?
Well if you, Joe America, have saved money in those tax deferred accounts, you most likely will be considered wealthy by Medicare standards at some point in retirement.
Yup, wealthy…that’s you, the one who did what you were supposed to do, saved your money, and were a responsible adult!
Currently, Medicare assesses a surcharge to wealthy people who make too much income. This was done through the Income Related Monthly Adjusted Amount (IRMAA) that was part of the Medicare Modernization Act in 2003. Yup, this has been going on for over a decade, and surprisingly, not one financial firm or employer ever took the time to tell you about it.
This surcharge is a potential extra 40% to 220% tacked onto Medicare Part B and D premiums for those that earn too much money. Luckily, this surcharge has been broken down into brackets with the first surcharge being assessed to those individuals who earned more than $85,000 in a year while retired, and $170,000 for couples.
The tiers increase until the maximum penalty, about 220%, is added on for those earning $214,000 as individuals and $428,000 for couples.
But keep in mind that these brackets are expected to be modified. The President has called for a reduction in income limits until 25% of all Medicare beneficiaries are impacted by IRMAA in one way or the other and at last glance, from the Bi-Partisan Policy Center, the brackets may fall by as much as 11% for individuals and as much as 46% for couples.
Anyone think that a couple who earns $90,000 in retirement is wealthy?
More importantly, what is the probability of you being defined as wealthy?
Besides the President wanting to ensure that 25% of retirees get hit by this, the odds, if you have been doing the wrong thing, are probably pretty high.
The reason: income is not what you think it is, as Congress, through the MMA and then again with the Affordable Care Act (ACA), has changed the rules of retirement for everyone.
Income is defined, per order of legislation, as “your modified adjusted income PLUS any tax exempt interest you may have or everything on lines 37 and 8b on the IRS form 1040.”
For those of you who are not accountants, this just means that almost everything you have in savings will be used against you when your health is on the line.
Some examples are Wages, Social Security, Dividends (even Muni Bonds), Capital Gains, Rental Income, possible Pension Income, or any withdrawal from any Traditional IRA which you will be forced to take at age 70.5.
A few exceptions that you can use to avoid all of this are accounts like 401(h) plans, Health Savings Accounts (HSA’s), revenue from primary residencies (Reverse Mortgages), certain Annuities (non-qualified or Roth Fixed Annuities), some Life Insurance policies (Whole Life and IUL’s) and finally, the easiest way, with Roth accounts.
Believe or not, the simplest way to avoid this seemingly inevitable tax increase, is to invest your retirement savings in a Roth account. But the problem is that many employers still have not made Roth accounts available to employees, and the financial industry is still refusing to tell you why you need one.
But how big can the problem be?
This may come as a shocker, but that $220,000 amount in healthcare costs that the average couple will face in retirement (which the financial industry keeps repeating) from Fidelity Investments is nowhere near the mark.
Medicare today is close to $8,100 per couple, for those that want to be fully insured, and before any additional costs from dental work, optometrist appointments, or a prescription drugs co-pays and deductibles are imposed.
Again, this may not sound like much, but we also have to take the inconvenient truth of inflation into account. Even though Fidelity Investments keeps repeating that $220,000 figure, it is on record in its “Planning for healthcare in retirement” presentation as stating that according to the Department of Health and Human Services, health costs are expected to inflate by as much as 6.2%.
With the average 65 year old female expected to live until 85 years young, and the average male expected to roam the earth until they are 83, per Social Security Fidelity’s number is closer to $305,000.
For those of you who happen to be 55, the number may look much worse as time allows for this figure to be compounded even higher. With the rate of inflation remaining at 6.2%, an average couple should expect to incur about $557,000 in Medicare premiums alone.
Keep in mind that historically since Medicare’s inception, premiums for at least Part B have risen well over 7.0% over time while Medicare Part D is expected to inflate, according to the Medicare Board of Trustees by over 9.0% through at least 2022.
Don’t worry about figuring out how you’ll pay for this though. Thanks to legislative rulings that are now over a decade old, the bulk of this cost will be paid directly from your Social Security benefit, which is the very reason why Social Security will most likely never go broke.
The reality is that your benefit will most likely never increase throughout your retirement, thanks to your healthcare premiums. And again, we have to ask… who has ever told you this?
Unfortunately, not your employer, who just happens to have a fiduciary responsibility which states that they have to tell you about this at least once. Nor will those financial institutions who have stated ad nauseum that they will help you enjoy retirement, but for some reason have neglected to mention any of this for the last part of a decade.
Now, just imagine what Congress has cooked up for you with this latest “kicking of the Medicare can”, as they are eyeballing an adjustment of the already extra 40% to 220% more of your Medicare premiums if you happen to be considered wealthy by their standards.
Is your healthcare, which is something that you have to have or else, still a reality that you, your employer, and your financial professional should neglect to plan for?
For more information on where your health costs may be headed, please see our free Scepter Lite software at www.yourretirementcosts.org, or just ask your financial professional and/or employer if they have access to Money Guide Pro’s financial planning software – arguably the best tool on the market to that can help plan for this issue with just one click of a button.