Social Security Trap?

Reader Question:  I understand the potential advantages of delaying social security past 66; one being that your spouse will have a higher benefit upon death of the primary earner.  I was planning to delay SS for this reason. However, there have been several recent articles that indicate premiums for Medicare Part B coverage will skyrocket next year. However, if you were paying the premium by deduction from your Social Security benefit, they won’t go up because there is no COLA this year for Social Security. In other words, in effect, a penalty for not paying your Medicare part B through Social Security. This curve ball has me reconsidering delaying taking my Social Security.  What are your thoughts?

Answer:  You’re right; this is a proverbial curve ball.  The 2015 Social Security Board of Trustees has indicated that Medicare Part B premiums could rise as much as 52% beginning January 2016 due to higher-than-expected costs related to physician visits and outpatient care.  For most enrollees, Medicare Part B premiums are about $105 per month deducted directly from their Social Security income payments.  A fifty percent increase would be about $50 per month or $600 per year (twice this amount for couples if both are Medicare age).  The cost-of-living increase in Social Security benefits is expected to be zero for 2016 so for most recipients, their Medicare Part B premiums will not rise.  This is because under the ‘hold-harmless’ provision, if you’re paying Medicare Part B as a deduction from your Social Security income, there can be no premium increase that would cause your SS payment to go down.  Here are some important exceptions:

  • If you’re not taking Social Security (i.e. you delayed benefits), you’ll be hit with the higher Medicare Part B premiums.
  • If you’re not having your Medicare Part B premiums deducted from your Social Security payments, you’ll pay the higher premium.
  • If you’re receiving Social Security payments but your modified adjusted gross income is greater than $85,000 for single filers or $170,000 for joint filers, you’ll pay the higher premium.
  • New Medicare enrollees for 2016 will pay the higher premiums.

What you should do

If you file for Social Security by end of October for benefits to begin in November and have your Medicare Part B deducted from your SS payment, you’ll fall under the hold-harmless provision discussed above.  However, this may not be a good reason to abandon the ‘delay SS until age 70’ strategy.  An age 66 benefit of $2,000 per month would become $2,640 if delayed until age seventy.  Also, the SS Board of Trustees has indicated this may be a one-time bump and that premiums may drop in 2017.  Consult your tax advisor before making irreversible changes.

Reader Question:  I turn 65 this year and have been getting a ton of mail asking me to sign up for Medicare.  I plan to continue working, have great company health insurance and plan to delay taking Social Security.  Must I enroll in Medicare or can I wait a few years?

Answer:  Kimberly Reynolds, CFP®, had this to say, “The good news is you can probably ignore the advertisements for the Medicare plans right now! Most company plans allow you to stay on your current health insurance plan as long as you are employed. This is typically the best option for most people. I recommend you confirm with your company that you are allowed to stay on the plan after age 65. Three months before you retire, you will need to sign up for Medicare and add a supplemental and prescription plan or Advantage plan.”