There are times we read things that cause us to say, as
my friend puts it, “I’ll have to think on that.” Such a time occurred as I read an article in
the April 28, 2014 Investment News (pg. 40) written by Mary Beth
Franklin. The basic premise was that, in some cases, Medicare costs could
exceed the Social Security benefit that one receives. Let’s look at that
possibility.
Social Security
and Medicare-2014
For
2014, the Social Security tax rate is 6.20% of the first $117,000 of earned
income (a maximum tax of $7,254). The Medicare tax rate is 1.45% of all income
earned (no upper income exclusion). Thus, most employees pay 7.65% of the first
$117,000 earned in Social Security (OASDI) and Medicare (HI) taxes. That is the
employee portion only; employers pay an equivalent amount. Self- employed
individuals pay a tax rate of 15.30%. As of Jan 1, there is an additional 0.9%
Medicare tax (added by Obamacare legislation) on individuals earning greater
than $200,000 and couples earning greater than $250,000. Thus, the maximum tax rate could be 8.55%
(6.20% + 1.45% + 0.9%).
Now
consider Medicare costs. Medicare Part B (medical insurance) is deducted from
an individual’s Social Security benefit every month. There are two components:
one for medical expenses and one for prescription drug services. Since the
prescription drug service costs vary by location/plan, we will discuss only the
medical insurance costs. As one’s income level increases, so does the cost of medical
insurance (i.e. an increase in the amount deducted from monthly Social Security
benefits). That scale (for 2014) is shown below:
Modified Adjusted Gross Income (MAGI) Part B Premium Drug Plan
Indiv <$85k; Couple<$170K $104.90/month Per plan
Indiv $85k-$107k; Couple $170-$214k $146.90 Plan
+ $12.10
Indiv-$107k-$160k; Couple-$214k-$320k $209.80 Plan + $31.10
Indiv-$160k-$214k; Couple-$320k-$428k $272.70 Plan + $50.20
Indiv->$214k; Couple->$428k $335.70 Plan + $69.30
The
maximum Social Security benefit in 2014 is $2,642 at full retirement age. The
cost of living allowance adjustment (COLA increase) for 2014 was 1.5%.
Therefore, a high income individual might be receiving at most $2,236.90
($2,642-($335.70+$69.30)) less his/her individual prescription plan costs.
(Note: These figures were taken from the Social Security website and are
applicable for 2014; they change each year).
What’s to Come?
One
needs to spend only a short amount of time watching news/economic television
channels to see numerous discussions that “something must be done” about
entitlement programs (Social Security/Medicare). The current trajectory is
unsustainable. Various solutions have been proposed: 1) Increase taxes, 2)
Raise the retirement age for Social Security benefits, 3)Means test benefits
(those individuals with higher incomes will receive lower/no benefits from
Social Security), or some combination thereof. The purpose of this blog is not
to suggest solutions for the problem; that is in the political arena and, given
current political conditions, who knows what will happen. Our purpose is to
suggest that plans must be made for significant changes in health care expenses
as one prepares for retirement.
Health
care costs are expected to increase by 5-7% per year and Social Security
benefits to increase by 2% (unless changes are made to the COLA adjustment
index- such as use of a “chained CPI” calculation-but that is another
discussion entirely). Bottom line—health care expenses will consume a greater
proportion of Social Security benefits (if any are received) in the future.
In
previous a previous blog found HERE we have
discussed costs of health care under the current Medicare plans. They are
significant—providing approximately $300-400,000 for a couple in excess of
existing Medicare benefits. Any changes made in the current plan will only exacerbate
the shortage of money needed for health care in retirement.
What to Do?
Prudent
financial planning requires that one take appropriate action to prepare for
contingencies that appear possible or probable. If one looks down, sees a steel
rail on the left, a steel rail on the right, and a bright light down the tracks
in the distance, a good course of action might be to step off the railroad
track. So what does one do? Work longer? Save more? Spend less? Move to a lower
cost of living state? Purchase long term care insurance?
We
at Paragon Financial Advisors do not sell any commercial products (insurance,
etc.). We help our clients evaluate personal circumstances and assist in
determining the best course of action. Paragon
Financial Advisors is a fee-only registered
investment advisory company located in College Station, Texas. We offer financial planning and investment management.
