Average retiree will see Social Security benefit decrease

Those in retirement who are receiving Social Security benefits and are enrolled in Medicare may want to sit up and take notice of the latest Medicare Board of Trustees report released this month, as their Social Security benefit may be adversely affected.

The latest report from the Medicare Board of Trustees is calling for Medicare Part premiums to inflate by 22.3 percent, increasing the Part B premium to $149 per month from $121.80 per month in 2016.

At the same time, the Social Security Board of Trustees is also calling for a 0.2 percent cost-of-living adjustment (COLA) in 2017 for retirees who are receiving Social Security benefits.

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For the average retiree who is collecting the average Social Security benefit of $1,335 per month, this COLA increase means their Social Security benefit will rise by $2.67 a month.

This may not sound like much, but this slight COLA increase may go a lot longer than anyone is noticing.

The issue for retirees is that their Medicare Part B premium is automatically deducted from any Social Security benefit they receive. And with this COLA and somewhat large Medicare Part B increase, their take-home income from Social Security will be decreased.

Thankfully, though, there is a federal regulation known as the Hold Harmless Act, which states that a retiree receiving Social Security benefits and also earning under the national average of income and enrolled in Medicare cannot see their Social Security benefit decreased by increases in Medicare Part B premiums.

This is exactly what happened this year for many retirees.

In 2016 the Medicare Part B premium was increased by 16.1 percent, to $121.80 per month, from $104.90 per month in 2015.

Social Security did not issue a COLA in 2015, so those retirees who qualified (about 70 percent of them) received protection under the Hold Harmless Act, and their Medicare Part B premium thankfully remained at $104.90 per month.

Now, with this recommendation of an increase of Medicare Part B premiums for 2017, if Social Security issues a 0.2 percent increase, these 70 percent of retirees will be protected by the Hold Harmless Act and thus their Medicare Part B premium will only inflate by 16.1 percent, to $121.80 per month.

Since those that were enrolled in Medicare prior to 2016 have already been held harmless in 2016 due to increases from 2015, these retirees will automatically have their Medicare Part B premiums set at the 2016 Part B premiums in 2017, which is $121.80 a month.

This means the average retiree receiving Social Security will actually see their benefit decrease by $14.23 a month.

For those average retirees, who enrolled this year for the first time in Medicare and received Social Security benefits in 2016, they will enjoy the luxury of having their Medicare Part B premiums only inflate by their Social Security COLA amount.

Thus, for the average retiree who enrolled in Medicare in 2016, his or her take-home Social Security benefit should remain the same as the previous year — but please keep in mind that these scenarios only happen if there is a 0.2 percent or greater COLA from Social Security.

According to the Medicare Board of Trustees, "If the Social Security COLA is actually zero percent for 2017, then the provisions of the Bipartisan Budget Act of 2015 would be triggered, and the 2017 Medicare Part B premium would increase without the hold-harmless provision effects."

This means that if there is no COLA for retirees, then — due to federal regulations — every retiree will see his or her Medicare Part B premiums increase to at least $149, as no retiree will be protected by the Hold Harmless Act, thus decreasing every retiree's Social Security benefit.

So for those who enrolled in Medicare prior to 2016 and who were already held harmless in 2016 from increases in Medicare premiums in 2015, they will see their Social Security benefits decrease by $41.43 a month if there is no COLA.

Those who enrolled in Medicare in 2016 also will see a decrease of $24.53 a month in Social Security benefits if there is no COLA of at least 0.2 percent. They, too, would be granted the protection of the Hold Harmless Act. But their Medicare Part B premium would be increased by 16.1 percent to meet the 2016 Part B premium of $121.80 per month, and their Social Security benefit would be decreased.

The outcome of these recommendations from the Medicare Board of Trustees hopefully shines a light on the importance of planning for health coverage in retirement. And the real question that should be on everyone's mind is what retirees are going to do when they find out that their Social Security benefit was decreased by an expense that is required for them to bear in order to even be able to collect that benefit.

With the fiduciary rule for financial advisors expected to be implemented sometime in 2017, the ramifications of these recommendations from the Medicare Board of Trustees could prove to be costly not just for retirees but for the entire financial industry, as well.

— By Dan McGrath, co-founder of Jester Financial Technologies