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High earners face rising Medicare premiums

It's bad enough that the Social Security Administration is not expected to pay a cost of living adjustment for benefits next year. But high-income retirees will also have to bear the brunt of rising Medicare Part B premiums in 2016.

Here's why: Under current law, the Social Security Administration has to keep Medicare Part B premiums flat for about 70 percent of beneficiaries if it doesn't issue a cost of living adjustment. However, the administration also has to raise Part B premiums on the other 30 percent of beneficiaries to offset the costs of Medicare Part B premiums foregone. (Medicare Part B covers services and supplies deemed medically necessary for seniors.)

Boston College's Center for Retirement Research estimates that most Medicare beneficiaries will pay $104.90 per month for Part B coverage next year while other beneficiaries will have to pay at least $159.30 per month for the same coverage, a 52 percent difference. Wealthier retirees are expected to pay even more. For them, Medicare Part B premiums will range from $223 per month to $509.80 per month depending on their income.

(See chart below.)

(Source: Center for Retirement Research at Boston College)

About 2.9 million Medicare beneficiaries—single people with incomes above $85,000 and married couples who earn more than $170,000 — pay higher premiums for Medicare Part B coverage this year. That's an estimated 6 percent of the total population of Medicare beneficiaries. (State Medicaid programs will pick up the tab for the roughly 24 percent of the beneficiaries who will have to pay higher Medicare Part B premiums next year because they are enrolled in both Medicaid and Medicare programs.)

By 2036, the number of people who pay higher Medicare premiums based on their income will rise to more than 6.26 million, or 7.8 percent of Medicare beneficiaries, according to projections by the Kaiser Family Foundation. That's because the triggers for the income-related charges aren't indexed to inflation until 2020.

"There is some concern that more of these Medicare income-related charges are coming," said Juliette Cubanski, the associate director of the Kaiser Family Foundation's program on Medicare policy. "But the vast majority of people on Medicare have very small incomes. The median income of a Medicare beneficiary is about $24,000."

Retirees or people near retirement who are concerned about being hit by a higher Medicare surcharges can take steps now to avoid them.

Many of the strategies to lower Medicare premiums involve minimizing your modified adjusted gross income, known as MAGI. It is your total adjusted gross income plus tax-exempt interest income. The Social Security Administration uses MAGI, based on your federal tax return, to determine if you have to pay income-related premiums for Medicare Part B and Part D, which covers prescription drugs.

Investing in life insurance, non-qualified annuities, Roth IRAs and Health Savings Accounts can decrease your MAGI and reduce Medicare Part B and D surcharges, said Ron Mastrogiovanni, president and CEO of HealthView Services, which helps financial advisors forecast health-care costs for their clients.

"It can get complicated, and I always recommend talking to a financial advisor for this," Mastrogiovanni said. "But moving down from one Medicare cost bracket to a lower one can save you tens of thousands of dollars in retirement."

If you have to pay higher Medicare premiums, the Social Security Administration will send you a letter with your premium amounts and an explanation for its determination.

"Read the letter closely," said Katy Votava, president of Goodcare.com, a consulting firm that advises business and consumers about health-care financing.

You can challenge the Social Security Administration's determination if you've had a life-changing event over the past year that would affect your income while receiving Medicare benefits. Such events include a marriage, a divorce, the death of a spouse, a reduction in work hours and the loss of an income-producing property by disaster. You have 60 days to challenge the Social Security Administration's proposed income-related premium charges.

"The biggest mistake people make when they receive letters about their Medicare premiums is that they don't respond quickly enough to the letters," Votava said.

Correction: An earlier version of the story misstated the number of people projected to pay income-related Medicare premiums in 2036 and when those income-related charges would be indexed to inflation.