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Medicare Part B premium hike will be smaller than expected

Seniors caught a break Thursday when the Obama Administration announced that Medicare Part B premiums won’t rise as much as expected in 2012.

The premium for Part B – which funds doctor and other outpatient services – will be $99.90 in 2012, up just 3 percent compared with this year. And the Medicare Part B deductible will be $140, a decrease of $22 from 2011.

The official government 2012 Part B premium forecast had been $106.60 – an increase that would have taken a significant bite out of Social Security’s cost-of-living adjustment (COLA). Although Social Security beneficiaries will receive a 3.6 percent raise next year, the average beneficiary’s increase would have been shaved to 2.95 percent if the larger Part B increase had been implemented. Part B premiums are deducted from most seniors’ Social Security benefits.

Today’s news means that seniors receiving the average monthly Social Security benefit ($1,177) will see a net 3.3 percent gain in payments – just under $39 per month.

In 2010, the Part B premium jumped to $110.50 from $96.40, and it rose to $115.40 in 2011. The rate is determined partly by healthcare inflation — but also the number of seniors who actually are subject to higher premiums. By law, the premium cannot rise in any given year by a greater amount than the Social Security COLA – a “hold harmless” provision aimed at preventing Social Security payments from ever falling. About 75 percent of beneficiaries were exempted in this way from Part B premium increases in 2010 and 2011 – years in which no Social Security COLA was made.

Medicare enrollees cover 25 percent of projected Part B program costs; in 2010 and 2011, that projected cost was borne by a much more narrow base of beneficiaries. This year’s Social Security COLA means that beneficiaries’ portion of Part B cost will be spread across a much broader pool of seniors, resulting in the more modest premium hike.

The new premium will mean a decrease for seniors who enrolled in Medicare for the first time this year, and have been paying the $115.40 rate. It should also lead to decreases for high-income seniors, who were subject to the higher base premium, along with additional income-related surcharges.

Medicare will cut Social Security’s “raise” in 2012

After two years without an inflation adjustment, the Social Security Administration is expected to announce a 2012 cost-of-living adjustment (COLA) of more than 3 percent next week. That would be a sizable raise in this economy, and very welcome news to seniors hit hard by rising costs, slumping home equity and very low returns on fixed-income investments.

But the good COLA news will come with a nasty kicker. Many seniors will see a substantial part of the COLA consumed by a higher premium for Medicare Part B (doctor visits and outpatient services), which usually is deducted from Social Security payments. The situation sheds light on the complex interaction of Social Security COLAs and Medicare premiums — and it underscores the critical importance of the Super Committee deficit deliberations on possible cuts to future COLAs.

The annual Social Security COLA is determined by a formula that averages inflation for the third quarter, as reflected by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). No COLA was awarded in 2010 or 2011 due to a quirky spike in the third quarter of 2008, which resulted in a whopping 5.8 percent COLA for 2009. By law subsequent Social Security payments couldn’t rise until the CPI-W exceeded the 2008 level.

This year, the third quarter CPI-W has been running high as a result of higher energy costs. September inflation numbers will be released on October 19th, and most analysts forecast a resulting 2012 COLA greater than 3 percent. Indeed, some expect a number close to 3.5 percent or more.

That’s the good news. Unfortunately, most seniors would see that COLA reduced substantially, due to the way that Social Security benefits and Medicare Part B premiums interact.

The Part B premium usually rises at a rate greater than general inflation — a reflection of medical inflation. However, by law, the premiums cannot rise in any given year by a greater amount than the Social Security COLA – a “hold harmless” provision aimed at preventing Social Security payments from ever falling.

About 75 percent of beneficiaries were exempted in this way from Part B premium increases in 2010 and 2011. Rate hikes were paid only by two groups of seniors: low-income beneficiaries whose premiums are paid by Medicaid (so-called “dual eligibles”) and high-income seniors who pay income-related surcharges.

Social Security, Medicare dodge bullet, but cuts loom

Social Security and Medicare dodged a bullet in the debt ceiling battle, but beneficiaries still have plenty to fear from the next phase of the deficit reduction war.

The agreement to raise the debt ceiling means seniors will receive their August Social Security benefits – something many worried about after President Obama said last month that he “couldn’t guarantee” the payments if default occurred. Likewise, Social Security and Medicare benefits both were exempted from the $917 billion in first-phase cuts that paved the way for the debt ceiling deal.

But major benefit cuts seem likely to emerge from the second phase of this process. A 12-member Congressional committee must identify another $1.5 trillion in spending cuts, bringing the total deal to $2.4 trillion in cuts over 10 years. That group will have a November 23rd deadline to finish its work, which will then go to an up-or-down vote – no modifications allowed – by Dec. 23rd.

What’s more, if the committee cannot agree on at least $1.2 trillion in savings, or Congress rejects its findings, automatic spending cuts totaling that amount would kick in starting in 2013. Medicare would be subject to the automatic cuts, although Social Security and Medicaid would be exempt.

The enormous pressure to identify $2.4 trillion in cuts boosts the odds that Social Security benefit cuts will be proposed. Re-stating what I’ve said so many times: this would be unfair and unwise. Social Security doesn’t contribute to the deficit, and it will be a critical source of support for recession-ravaged seniors in the decades ahead.

The most likely cutting tactic is the chained CPI measure of cost-of-living adjustments (COLA). This is the only way to get near-term savings from Social Security, since it reduces benefits for current retirees. By contrast, a higher retirement age would have to be phased in over many years.

A chained CPI could be implemented as early as 2013. The chief actuary of the Social Security Administration estimates that the chained CPI will rise about 0.3 percentage points less per year than the inflation measure used now, the CPI-W. With compounding, that translates to a monthly benefit cut of 8.4 percent for a retiree at age 92 (calculated from age 62, the first year of eligibility), according to the National Academy of Social Insurance.

3 more gloomy bargains: How much the debt deal will cost you

No matter what plan Washington concocts to reduce the deficit, it’s going to cost you something. “Shared sacrifice” is in vogue, but your pain will be bigger if you’re unfortunate enough to earn wages or need social benefits.

Most conservative deficit-reduction plans shred the social safety net and cherished personal write-offs in unprecedented ways. The core elements of each proposal will pare middle-class tax breaks, Medicare and Social Security.

As Yogi Berra once said, “it’s déjà vu all over again.” The $3.7 trillion Senate “Gang of Six” plan and related iterations bear a striking resemblance to a “Moment of Truth” deficit commission report issued, and mostly ignored, late last year and pieces of a Heritage Foundation plan ironically entitled “Saving the American Dream.”

No plan will preserve or protect the American Dream as we’ve come to know it. And the powers that be don’t seem to be rattled by the potential chaos if an agreement on raising the federal debt ceiling by Aug. 2 doesn’t happen. Markets may collapse, benefits will be delayed and salaries won’t get paid if the U.S. can’t issue more debt, but the Beltway bickering goes on.

Instead, we have this power play in the form of Byzantine musical chairs. One sure loser is already ordained, though: Middle America. Let’s look at where the deficit commission, Senate and Heritage plans intersect:

“Broaden the tax base” This is one of the most Orwellian prevarications since the coining of the “death tax.” (Have you ever met a dead person who paid a tax?) When conservative policymakers say this, they don’t mean raising taxes, they mean lowering tax rates and eliminating “tax expenditures,” like deductions for individuals.

The Senate “Gang” plan proposes three tax brackets ranging from eight to 29 percent. Currently the highest personal tax rate is 35 percent. The Senate plan would also cut the hated $1.7 trillion alternative minimum tax. At first blush, both moves will reduce revenue flowing into the Treasury and balloon the deficit. How would the Senate make up the shortfall, considering that it also cuts corporate tax rates from 35 percent to as low as 23 percent? They say: “Reform, not eliminate, tax expenditures for health, charitable giving and homeownership.” Bottom line: Your after-tax cost for healthcare and mortgages may be higher. Although limiting the mortgage interest deduction to one home and capping it isn’t a bad idea, this is not a “broadening” of the tax base. Middle class workers will pay more — unless the cost of healthcare and homeownership mysteriously drop.

5 ways a big deficit deal will whack your retirement

If Washington strikes a big deal on deficit reduction to avoid debt default, it’s going to be bad news all around for older Americans.

The debt crisis negotiations may yield no more than a short-term Band-aid and sidestep long-term changes in spending policy. But it’s clear that the Obama Administration and some lawmakers are reaching for a big deal patterned on ideas developed by politicians positioning themselves as bipartisan budget peacemakers.

So, while average Americans worry about the ongoing jobs crisis and vanishing retirement security, lawmakers and the President make plans for deficit reduction that will whack vulnerable older Americans.

Many of the spending cut ideas come from the final non-report of the President’s own deficit commission. (I call this a non-report because co-chairmen Alan Simpson and Erskine Bowles couldn’t muster the votes needed from commission members under their own rules to report out a final document, yet Washington accepts what the co-chairs issued as an official document). Other key ideas are embodied in the bipartisan plan du jour presented by the on-again, off-again Gang of Six.

Watch out for these possible blows to retirement security as the debt default deadline approaches:

A higher Social Security retirement age. Simpson and Bowles call for raising Social Security’s full and early retirement ages. Their changes would effectively reset the full retirement age to 68 by 2050 and 69 by 2075; the early retirement age would rise to 63 and 64 in those same years. That comes on the heels of the increases already made in the 1983 reforms, which moved full retirement age to 67 in 2022.

Simpson-Bowles and others have argued that higher retirement ages are justified by the population’s rising longevity, but it’s really just a back-door benefit cut for everyone, no matter when you file for benefits. That’s because your monthly benefit is determined by the normal retirement age (NRA) at the time you file; if you file before your NRA you’ll be penalized, and if you file later you get an eight percent bump in monthly payments.

5 questions about Social Security and the debt ceiling

Social Security is a pawn in the negotiations to avoid a federal debt default, and that has stirred fear and confusion among current and future beneficiaries. President Obama has threatened not to make August benefit payments in the event of a default, and signaled that he is open to cutting Social Security if it helps him secure a big deficit-reduction deal with Republicans.

Let’s look at where Social Security stands on the D.C. chessboard:

Should I be worried that I won’t receive my Social Security benefit in August?

President Obama stated recently that he “cannot guarantee that those checks go out on Aug. 3 if we haven’t resolved this issue. Because there may simply not be the money in the coffers to do it.”

On its own, Social Security’s coffers are full enough to make the August payments. Social Security is cash flow positive – it generates more from current revenue than it spends on benefits and its own administrative costs. The main source of revenue is the payroll tax paid by employers and employees (the Federal Insurance Contributions Act, or FICA); other income sources include interest payments on bonds in the Social Security Trust Fund (SSTF) and taxes paid by higher-income beneficiaries.

Last year, revenue totaled $781 billion, while outgo was $713 billion. And even if funds aren’t on hand in a given week to pay benefits for timing reasons, the SSTF can redeem bonds to make up the shortfall.

Here’s the rub: the bonds are obligations of the U.S. Treasury back to the SSTF. A government debt default would put us in uncharted waters, and it’s entirely possible that the Administration could refuse to redeem bonds or divert payroll tax receipts to meet other pressing obligations.

Why Social Security COLA cuts will whip up a fight

If you want to tick off a senior, just mention Social Security’s cost-of-living adjustment (COLA). The COLA has been on auto-pilot since 1975, when the first automatically-adjusted benefit adjustment was made, using a formula tied to the Consumer Price Index. A COLA was awarded every year from that time until 2008, but since then — nada.

Uncle Sam’s stinginess resulted from a quirky spike in the CPI-W — the index now used to determine the COLA — in the third quarter of 2008. Just before the economy crashed, the CPI-W spiked temporarily due to a big increase in energy prices. The result was a whopping 5.8 percent COLA for 2009. Social Security payments can’t rise until the CPI-W exceeds the 2008 level — and they can’t fall under federal law — so benefits were held level in 2010 and 2011.

A 1.1 percent COLA is forecast for 2012 by the Congressional Budget Office (CBO). But debate is heating up in Washington about further changes that could enrage seniors anew.

Several of the key federal deficit reduction plans that have been advanced in Washington recommend shifting to a measure of inflation called the “chained CPI.” A chained index reflects changes that consumers make in their purchasing across dissimilar items in response to price changes; the theory is that a spike in gasoline prices will prompt consumers to spend less on fuel, perhaps more on food. And so on.

The chained CPI could be applied to federal benefit programs and to the income tax code — although it stands to generate far more benefit cuts than revenue gains.

On the benefit side, a chained CPI would impact Social Security, civilian and military pensions and veterans’ benefits and Supplemental Security Income. On the revenue side, a chained CPI might be applied to inflation adjustments for tax brackets in the personal income tax code, effectively serving as a stealth tax hike by reducing tax bracket adjustments and subjecting more of individuals’ earnings to higher tax rates over time.

According to the CBO, benefit adjustments could yield $217 billion over 10 years, with 52 percent of that — $112 billion — coming from reduced Social Security COLAs; income tax bracket creep would generate $72 billion.

Lessons for retirees from the bear market decade

The past decade produced a rare event — two vicious bear markets that wrecked the plans of many retirement investors. The impact was especially severe for those close to retirement, or already retired. What, if anything, could retirees have done differently to avoid running out of money in retirement — and what could they do differently in the future?

T. Rowe Price examines this question in a new study that uses Monte Carlo probability analysis to look at likely outcomes of different retiree responses to a bear market. T. Rowe examined strategies that would help retirees restore their odds of success — defined as not running out of money before age 95.

The key finding: retirees struggling in the past decade could boost significantly their odds of success by adjusting their withdrawal rates.

If that sounds to you like a fancy way of saying “tighten your belt,” you’re be right. Our economy and markets are struggling to recover from the worst financial meltdown since the Great Depression, and there really are no magic bullet solutions. The answers all require sacrifice, adjustments and hard work.

Strong planning focuses not just on the first few years of retirement, but on long-term retirement security — how to reliably generate income to support a retirement that could last 25 years or more for you or your spouse.

The T. Rowe Price analysis underscores a key point about retirement planning in hard times: Income and assets are just one set of values in the retirement security equation; on the other side is lifestyle and spending.

The analysis starts with a hypothetical worker who retires on January 1, 2000, with a $500,000 portfolio invested 55 percent stocks/45 percent bonds. Four withdrawal strategies are analyzed using Monte Carlo probability analysis to understand the likely impact on the portfolio using actual returns for stocks and bonds in the following ten years — including the deep bear markets of 2002 and 2008-2009:

Obama lays down a marker on Social Security cuts

Would he or wouldn’t he?

President Obama’s deficit commission endorsed cutting Social Security benefits last month, and many wondered whether the president would endorse those cuts in his State of the Union message this week. Instead, the president reiterated the traditional Democratic position on Social Security in his address that he staked out as a candidate in 2008:

“We must [strengthen Social Security] without putting at risk current retirees, the most vulnerable, or people with disabilities; without slashing benefits for future generations; and without subjecting Americans’ guaranteed retirement income to the whims of the stock market.”

That rhetoric differs significantly from the “everything on the table” messages emanating from the White House since the National Commission on Fiscal Responsibility and Reform issued its final report. Written by commission co-chairmen Alan Simpson and Erskine Bowles, the report recommended benefit cuts via a higher retirement age, lower annual cost-of-living adjustments (COLA) and a third, somewhat technical change in the way benefits are calculated.

What happened in the weeks since the release of the commission report? A coalition of traditional Social Security backers and Democratic lawmakers seem to have convinced the White House to back away from the Simpson-Bowles recommendations. Their case had two main points — both correct:

1. Cutting benefits is bad policy. That’s because Social Security has nothing to do with the federal deficit. The program ran a $2.5 trillion surplus in 2009, a number that will hit $3.8 trillion in 2020, according to the Economic Policy Institute. The surplus has been accumulating since implementation of the last Social Security reform measures in 1983, which were implemented for the purpose of building a cushion to fund the anticipated big wave of baby boomer retirements.

5 retirement security threats to watch in 2011

The oldest baby boomers start turning 65 on January 1st, and the biggest generation has plenty to worry about as it starts filing Medicare applications. The road to retirement security is filled with potholes; here are the five threats that worry me most looking ahead to 2011:

1. Social Security reform. Members of Congress and President Obama were for deficit cutting before they were against it, passing a massive $858 billion tax cut package this month. But they’ll be for deficit cutting again in 2011, and Social Security will be in the cross-hairs. Most of the deficit reduction plans issued this month by Washington’s serious people would lift the retirement age, and reduce cost-of-living adjustments.

The serious people should be mindful of the following myths and realities when Social Security comes up again for sacrifice in 2011:

Myth: The boomer age wave will push Social Security into insolvency and rob our grandchildren of their future.

Reality: Social Security has a $1.5 trillion surplus that has been built up — intentionally — since the 1980s to fund boomer retirements. They’re already paid for; the program’s solvency problem starts around 2035. And the real losers in Social Security “reform” will be GenXers and the generations that follow.

Myth: We should raise the Social Security retirement age, because we’re all going to work longer, anyway.

Reality: Working longer is a key strategy for improving retirement security ― for knowledge workers and professionals best positioned to pull it off. It doesn’t work well for workers who do physically demanding low-income jobs. Proposals to put these workers on disability benefits could be more expensive than just keeping the current retirement age rules.