COLUMN-US retirees to get slim government benefits boost in 2014
CHICAGO, Nov 5 (Reuters) - U.S. senior citizens and retirement savers finally got the word last week on three critical inflation adjustments for next year.
And the word is - not bad.
The announcements of cost-of-living adjustments (COLA) for 2014 were delayed by the recent government shutdown. Now the COLA figures for Social Security, Medicare and limits on contributions to retirement savings accounts have been released. It will be a year of moderate Social Security benefit bumps, flat Medicare premiums and status quo for retirement savers.
As they say in the world of sports - let's go to the videotape.
Social Security is one of the few retirement benefits that comes with an automatic cost-of-living adjustment, geared to the Consumer Price Index for Urban Wage Earners and Clerical Workers during the third quarter each year.
The COLA for 2014 will be 1.5 percent, starting with January payments. It is the lowest percentage increase in a decade, but seniors will be able to keep the entire bump-up. That's because Medicare Part B (outpatient services) premiums, which are deducted from Social Security checks, will be unchanged next year. (More on this below.)
By comparison, last year's Social Security COLA was 1.7 percent - but a $5 increase in the monthly Part B premium reduced the effective COLA to 1.2 percent for someone getting a $1,000 Social Security benefit.
This year's COLA news comes just as budget negotiators are weighing a possible change in the inflation formula that could effectively trim future COLAs by three-tenths of a percentage point - the wonkily named "chained CPI."
A chained CPI would start out as a small nick but could snowball due to compounding. The largest future impact would be on the very old. The National Women's Law Center calculates that a senior with a benefit of $1,400 per month ($16,800 annually) would lose a cumulative $8,100 in benefits by age 80, $19,256 at age 90, and $24,976 at age 95.
Medicare premiums will be flat - or down - for the third consecutive year in 2014. The Centers for Medicare & Medicaid Services (CMS) says the Part B premium will stay at $104.90, which is well below its historic peak of $115.40 in 2010. The Part B deductible also is unchanged at $147. The Part A deductible that beneficiaries pay when they are admitted to the hospital will rise by $32 to $1,216.
The surcharges that high-income seniors pay for Medicare Part B also are holding steady next year. The surcharges kick in for individuals with income of $85,000, and joint filers reporting $170,000 or more. They range from $42 extra per month up to $230.80 for the highest-income seniors.
The Obama Administration was quick to credit the Affordable Care Act, also known as Obamacare, for the encouraging Medicare cost trends, but most experts are taking a wait-and-see attitude.
Healthcare has been eating into the value of Social Security COLAs. During the past 10 years, Medicare Part B premiums have risen by an average of 6.4 percent; the chained CPI is up by an average of just 2.25 percent over the same period.
And prescription drug plan costs are still rising. Average plan premiums will be up 5.1 percent next year, according to research and consulting firm Avalere Health, and half of the 10 most popular plans are raising premiums at double-digit rates.
One bright spot here is Obamacare's reform of the donut hole - the gap in drug coverage that starts when combined spending by an enrollee and his insurance provider hits a certain dollar amount. The hole is closing gradually under healthcare reform; next year, the gap will begin when combined spending by patient and insurer hits $2,850, and will end when spending reaches $4,550. The law also provides for steep discounts on brand and generic drugs purchased by seniors who fall into the donut hole.
CMS says the 2.8 million seniors who entered the donut hole coverage gap saved an average of $834 through the first nine months of 2013, up from savings of $657 in the same period last year.
Those savings result from specific reforms in the Affordable Care Act, including discounts on brand and generic drugs, and a gradual closing of the donut hole.
RETIREMENT ACCOUNT CONTRIBUTIONS
The Internal Revenue Service adjusts contribution limits for retirement accounts for inflation annually using a formula similar to the Social Security COLA. The ceilings won't change in 2014, because the rate of inflation was too low to trigger an increase, the IRS said.
That means employee contributions to workplace 401(k) plans will be limited to $17,500. Catch-up contribution limits for workers over age 50 remain at $5,500.
The limit on annual contributions to Individual Retirement Accounts sticks at $5,500, while catch-up contribution limits stay at $1,000.
Only a small number of workplace retirement savers will bump into the ceiling - just 6 percent of 401(k) participants hit the ceiling in 2012, according to benefits consulting firm Aon Hewitt. The average contribution for 2012 was just under $8,000.
Of course, only a small percentage of workers earn enough to max out their 401(k) contributions. Misunderstandings may also be holding back contributions. A survey by Mercer shows the average 401(k) participant believes the limit is only $8,532, just under half the actual threshold. And 34 percent of respondents say they would max out their 401(k) contributions if they could live the last 12 months over again.
Those numbers underscore the need for better education and communication programs from plan sponsors about the difference between contribution limits and employer matching contributions, says Dave Tolve, defined contribution business leader and partner at Mercer, a unit of Marsh & McLennan. "It's very common to see a message from sponsors to workers that they need to maximize the matching contribution - but people may be thinking they've actually maxed out in terms of the IRS limit," he says.
Tolve also thinks the growing popularity of automatic 401(k) enrollment - usually at 3 percent of salary - may be partially to blame for employee misunderstandings about contribution limits. "It does create negative inertia - once I'm enrolled, there's no more work to do," he says.