Substantial Medicare premium increase looms for those delaying Social Security benefits

When most people reach age 65 they qualify for Medicare insurance, but basic Medicare covers hospital services only (Medicare Part A). Therefore, almost everyone buys Medicare Part B coverage, which pays for doctor and outpatient services.

Normally, people have the Medicare Part B premiums deducted from monthly Social Security benefits. In 2015, most Medicare beneficiaries pay $104.90 per month for Medicare B. This, of course, assumes that you are taking Social Security benefits when you go onto Medicare.

About 25% of retirees — individuals with a Modified Adjusted Gross Income over $85,000 or married couples with a combined MAGI of $170,000 or more — pay higher monthly premiums for Medicare Part B, and in some cases, a lot more. MAGI includes annual adjusted gross income plus tax-free interest.

There are five Medicare premium brackets. In 2015, the higher income surcharges for Medicare Part B range from $42 to $230.80 per month on top of the standard $104.90-per-month premium. These premiums, which could be as much as $335.70 per month, apply per person, so married couples where both spouses are Medicare age would pay twice as much.

The income brackets are based on the latest available tax return. A 2014 tax return filed in 2015 will be the basis for the Medicare premiums paid in 2016.

The 2015 Social Security and Medicare trustees report projects a 52% increase in Medicare Part B premiums for 2016. The actual increase, which may vary from the projection, will be announced by the Department of Health and Human Services in the fall. And they also project a 0% COLA increase in Social Security benefits.

Only some Medicare beneficiaries, however, will pay the higher premium next year. That’s because the Social Security Act contains a “hold harmless” provision that says a Social Security beneficiary cannot pay a larger increase in Medicare Part B premiums than they receive in a Social Security COLA increase in order to avoid someone seeing a net reduction in their Social Security benefit.

So if there is no increase in Social Security benefits then there can be no Medicare Part B premium hike for most beneficiaries.

But there is an exception to the hold-harmless provision, and it is likely to affect many high-income recipients: anyone who is subject to Medicare premium surcharges (based on the higher income brackets described above) is not protected by the hold-harmless provision. Neither are individuals who are newly entitled to Social Security in 2016 or those who are enrolled in Medicare but who have not yet started to collect Social Security benefits.

That includes recipients who elected to file and suspend their Social Security benefits. This claiming strategy allows an individual at 66 or older to file for benefits but to suspend them until later. That allows them to accrue delayed retirement credits worth 8% per year for every year they postpone collecting benefits beyond full retirement age up to age 70 for a potential benefit increase of 32%.

But because individuals who have elected to file and suspend are not actually receiving benefits, they can’t experience a net decline in benefits if Medicare premiums increase. Therefore, they will pay a higher Medicare Part B premium in 2016.

There is a way to avoid the higher Medicare Part B premiums next year, but it could be a mistake in the long run: As long as a retiree receives Social Security benefits for November and December of 2015 and have their Medicare Part B premiums deducted from those benefits, the hold-harmless provision will apply. That also assumes the retiree’s income does not exceed $85,000 if single or $170,000 if married filing jointly.

So there’s the tradeoff: If recipients want to avoid a hike in Medicare Part B premiums next year, they need to apply for Social Security benefits by October so they can begin collecting them by November and have their Medicare Part B premiums deducted from those benefits. But it means forfeiting the annual 8% per year increase in future Social Security benefits that a retiree would get by waiting.

Keep in mind that a 50% increase in Medicare Part B premiums — approximately $50 per month or $600 per year — is still relatively small compared to a Social Security benefit of $2,400 per month at 66 increasing by $768 per month by delaying until age 70.

So all in all, the strategy of delaying Social Security benefits is still a good plan for most people, it’s that some will experience a bit of pain the meantime.

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