Reuters Money

Should rich people pay more for Medicare?

Should affluent seniors pay more for Medicare than everyone else? How about Social Security? Should we cut benefits for wealthy Americans?

Ideas for “means testing” these critical retirement programs are front and center as deficit reduction talks move back into high gear in Washington. Many Republicans are arguing that Social Security benefits should be cut for wealthy Americans — an idea also backed by the bi-partisan Simpson-Bowles deficit report. Meanwhile, President Obama proposed higher Medicare premiums for high-income seniors this week as part of the deficit plan he submitted to the Congressional Super Committee.

But what does means testing really mean, and what does it mean to seniors on Social Security and Medicare? In this post, let’s consider means testing for Medicare; a follow-up post on implications for Social Security can be found here.

Traditionally, “means testing” has meant measuring financial adequacy to determine eligibility for welfare – that is, it tests for inadequacy, not abundance. Politicians tossing around the term now really mean reducing benefits or jacking up contributions for rich people. That may sound like a minor distinction, but it’s important if you consider that Social Security and Medicare aren’t welfare programs, but entitlements available to seniors up and down society’s spectrum of wealth.

Lacking the stigmatization welfare carries, both programs enjoy such broad public support. A survey released today shows that voters oppose cutting Social Security and Medicare to reduce the deficit by a 50 point margin, and that opposition to cuts is strong across party lines. The poll was sponsored by National Committee to Preserve Social Security & Medicare, an advocacy group — but conducted by a bi-partisan team of Democratic and Republican pollsters.

Medicare already features significant means testing for the wealthy. In fact, President Obama’s new proposal would only expand higher premiums for wealthy seniors first enacted under the Medicare Modernization Act of 2003. That law established higher Medicare Part B (doctor visits and outpatient services) premiums for individuals with $85,000 or more in annual income, and joint filers with income over $170,000.

Medicare drug plan changes: Time to shop around

Seniors enrolling in Medicare prescription drug plans face an unprecedented amount of change in plan offering during the annual enrollment period now underway.

A new analysis of the 2011 plans by Avalere Health shows that many plans have changed the lists of drugs they cover and their cost-sharing with consumers. The changes are especially pronounced among the country’s top-ten plans.

The bottom line for seniors: the plan you bought in 2010 may not suit you well in 2011. It’s more important than ever to study the drug plans carefully to be sure your drugs are covered, and at reasonable total cost. But the reshaping of plans for 2011 doesn’t mean seniors won’t be able to find solid coverage; in many cases, the changes reflect efforts by the drug plans to streamline their formularies—the list of covered drugs and the rules under which they are provided.

“Many companies are cleaning up their formularies in situations where they might have had both a generic drug and the branded equivalent on the list,” says Dan Mendelson, Avalere’s CEO.

For example, UnitedHealthcare’s AARP Medicare Rx Preferred — the Part D plan with the highest enrollment – reduced its formulary size by approximately 24 percentage points for next year, mainly due to elimination of brand-name drugs where generics were available.

Overall, Avalere found tremendous variation in coverage among the ten most popular plans. One plan — Humana Enhanced – covered 84 percent of all drugs while another — Wellcare Classic — covered just 46 percent.

Consumers may shoulder a higher share of costs for some drugs this year due to restructuring of the tiers – or classes – of drugs in many plans. Tiers are used to divide up different classes of drugs, such as generic, branded and specialty drugs for illnesses such as rheumatoid arthritis and cancer. Each tier has its own pricing and payment rules.

CD rates fall to all-time lows

Interest rates on bank certificates of deposit are at their lowest levels ever, Market Rates Insight reports. “For the first time since 1952, the average rate for all CDs dipped below 1 percent,” Dan Geller, the firm’s executive vice president, told Reuters.

That’s bad news for savers, but, as Geller points out, “what’s the alternative?”

Savers who want to keep their money in FDIC-backed banks — but need to squeeze out return — don’t have many options. However, here are some ways to make the most of that money.

Keep it in perspective. Small savers may be hardest hit by the continuing decline in rates, but they also have the least to gain by shopping around. If you have $10,000 to put into a CD, the difference between 1 percent and 1.3 percent is $30 for the year. That’s probably not enough money to justify spending hours searching for the best possible rate. It may be more worthwhile to keep your CD at your neighborhood bank, where it could help you qualify for free checking.

Index. CDs that link their returns to stock market returns or inflation usually offer lower rates to start than fixed-rate CDs. But in this environment, they are likely to end up paying a better return, says Geller. Similarly, step-up CDs, which will adjust interest rates up as market rates rise, could end up paying higher interest going forward.

Shop far and wide. Typically online-only banks and credit unions offer better deals on deposits than the big bricks- and-mortar megabanks. Use comparison shopping sites like Bankaholic and Bankrate to find the best available rates.

Build a Ladder. CD savers are often told to “ladder” their CDs by splitting their cash into several different CDs of varying maturities, and then renewing each one individually for the longest term. So, for example, an investor with $50,000 might put $10,000 each into a one-year, a two-year, a three-year, a four-year and a five-year CD. As each matures, the investor would trade it in for a five-year CD. In four years, all of their CD funds would be invested at the (presumably higher) five-year rate. But 20 percent of their funds would be freed up every year to reinvest at rates that most pros think will be higher in future years than they are now.