What’s New with Medicare and Social Security for 2017

The twin retirement benefits of Medicare and Social Security are ubiquitous in the lives of many Americans, in particular, those in or near retirement. As important as these programs are to people’s financial lives, there remain many misperceptions about the cost and sustainability of these benefits.
 
Changes to Medicare and Social Security are typically announced at the end of the year before changes are implemented in January. For 2017, there are significant changes to both programs that current and soon-to-be retirees should understand. It is important to know how these changes may affect your financial plan in the coming year and beyond.
 
 
Lowest Social Security COLA Ever
There have been a few years of zero cost-of-living adjustments (COLAs) since annual Social Security increases were implemented in 1975. Most recently, in 2016. But the benefit increase for 2017 will be just 0.3%—the lowest ever for a non-zero COLA.
 
Social Security COLAs are tied to inflation. Because inflation has remained at a very low level this past year, a minuscule COLA for next year is not surprising.
 
But such a tiny adjustment will be difficult for many retirees to manage, especially as health care costs continue to climb and premiums for Medicare and supplement insurance coverage rise as well. (More on that later.)
 
 
No Changes for Trust Fund Estimates
Revenue generated from Social Security tax receipts are still expected to exceed program costs for a few more years, until 2019 according to the latest Social Security Trustees report. But starting in 2020, the program will likely need to tap its reserves to pay full Social Security benefits to retirees.
 
With no legislative changes, these reserves are anticipated to last until 2034. The good news is, that estimate hasn’t changed from the previous year.
 
But the bad news remains the same—after 2034 (according to current estimates), Social Security is projected to receive only enough payroll tax income to cover around 79% of scheduled benefits.
 
These anticipated benefit reductions would fall hardest on current workers. Anyone around age 50 today would likely be the first to retire at a reduced rate of benefits, barring any changes made to the program.
 
Younger retirees would feel an impact too. For anyone retiring this year at age 67, as an example, their monthly Social Security benefit would begin to be reduced under these estimates at age 84—when many retirees generally have less flexibility to adapt to dramatic changes in their monthly income.
 
 
The Bigger Concern is Medicare
While Social Security appears to be on soft ground, the outlook for Medicare is worse, primarily because the costs of the program have grown more rapidly and the timing of trust fund depletions is expected to come much sooner.
 
The Medicare program has run a deficit since 2008 but is expected to be in the black for the years 2016-2020. Deficits return after 2020, potentially on a permanent basis.
 
Reserves for the Medicare Part A trust fund (which covers hospitalization costs) are estimated to last until 2028. After that, tax and premium revenue is only expected to cover 87% of Medicare costs, declining to 79% by 2040.
 
 
Part B Premiums Rise Higher for Some
For the majority of retirees, premium increases for Medicare Part B (which covers physicians’ services) are tied to Social Security COLA increases. Part B premiums cannot rise more than the annual dollar increase of the recipient’s Social Security benefit. This is what’s called the “hold harmless” provision. 
 
But there will be a number of Medicare recipients in 2017—around 30%—who fall outside of this hold-harmless provision and could potentially see substantial increases in their Part B premium rates for next year.
 
Generally, the individuals who don’t qualify for the hold-harmless provision include new Medicare enrollees, those with a modified adjusted gross income of $85,000 for single filers or $170,000 for married filers, and any retiree who chooses not to have their Part B premium deducted directly from their monthly Social Security benefit.
 
 
Tough Choices Ahead
The potential changes could include raising the Medicare and Social Security tax rate that current workers pay into the system or lifting the ceiling on wages that are subject to these taxes so that more income is taxed. (This ceiling will in fact be raised for 2017 to earnings up to $127,200. That’s an increase of 7.3% over the 2016 earnings ceiling.)
 
Future benefits may be reduced as well either through adjustments to the formula for calculating benefits or limiting the benefits wealthier retirees receive. The age of eligibility to receive full Social Security benefits may also change too, rising from the current eligibility age of 67 for anyone born after 1960. It’s possible that a combination of these approaches—slightly higher taxes and smaller benefit reductions—becomes the most palatable solution, pinching both current and future retirees equally.
 
The only certainty about Medicare and Social Security seems to be the tough choices we will face not too far down the road, both as a nation collectively and as individuals. By understanding these challenges now, investors can build some flexibility into their retirement plans to account for potential changes in costs or benefits and stay on course toward a more secure financial future.