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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.

Retirement confidence falls, especially in Social Security: Poll

Talk about a race to the bottom: Which institution do you think is losing the trust of Americans to provide future retirement benefits most quickly – government, or private employers?

The winner is . . . private employers, but not by much. A new national poll on retirement sentiment by Sun Life Financial Inc. finds worker confidence in the future value of employer-provided benefits plunged 32 percent in the past year. Meanwhile, confidence in the government’s ability to provide Social Security and Medicare benefits fell 22 percent.

Sun Life’s fourth annual Unretirement Index points to a sharp deterioration in Americans’ overall confidence about their ability to retire. The survey’s overall retirement confidence index fell nearly 20 percent to an all-time low compared with a year ago. Like several other surveys this year, the poll underscores the national mood of deep worry about financial security, especially in old age.

Along with worries about workplace and government benefits, only 23 percent of working Americans said they are very confident that they will be able to meet basic living expenses in retirement — plunging from double that number (42 percent) last year. And one in five workers said they will never retire.

The falling confidence in employers to provide benefits such as defined benefit pensions or health insurance “reflects a sense people have that an employee benefit is discretionary,” said Wes Thompson, president of Sun Life Financial.

“But the broader underlying trend is a shifting of responsibility to the individual – whether it’s from government or employers. That starts with the shift in recent years from defined-benefit to defined contribution plans, and much greater dependence over the last 10 or 15 years on employees to contribute more for their health care. Now it’s spreading to other areas of employer-paid benefits, such as life insurance and disability benefits.”

Thompson thinks falling confidence in Social Security and Medicare stems from the “public policy debate in Washington.” Indeed, we’ve seen repeated calls this year for a higher Social Security retirement age, reduced cost-of-living adjustments and a higher eligibility age for Medicare.

How cuts to Social Security Administration will hurt you

“Starving the beast” is a favorite conservative strategy for forcing cuts in federal spending. The idea is to deprive the government of revenue in order to force spending cuts – and resistance to new taxes is a central feature of the current Super Committee deliberations in Washington.

Advocates for older Americans are watching closely to see how the committee’s work might lead to retirement benefit cuts via a higher Social Security retirement age, smaller cost-of-living adjustments or higher Medicare eligibility ages. Meanwhile, a separate starve-the-beast exercise goes mostly unnoticed: a big squeeze on the administrative budget of the Social Security Administration (SSA).

The SSA is funded through the same Federal Insurance Contributions Act (FICA) tax that pays benefits, so it doesn’t compete for general revenue to meet its costs. But Congressional appropriators — who oversee its budget — have been squeezing the agency anyway.

In fiscal 2011, Congress provided the SSA with about $1 billion less than requested by President Obama. Those cuts forced the agency to make cuts that beneficiaries have noticed. It suspended mailing of the annual statement of benefits, and it shelved plans to open eight new hearing offices to handle the backlog of disability claims, which has soared during the recession.

SSA had planned to restore the statement mailings in fiscal 2012 to people over age 60 not yet receiving benefits  – but that won’t happen “if Congress doesn’t provide adequate support,” says SSA spokesman Mark Hinkle. (The agency currently is operating under the second continuing budget resolution for FY 2012, which expires Nov. 18.)

This may sound insignificant, but it’s not. The benefit statement provides a valuable annual reminder of what you can expect to receive and how benefits are calculated – and it prompts us all to make Social Security part of our long-range retirement plans. For now, the alternative is to use the SSA’s online Retirement Estimator, which gives you a personalized projection of future benefits.

Hinkle says the SSA also has responded to the tight budget by reducing employee overtime by 80 percent. That has cut into the amount of time available to help people who come into SSA local field offices for face-to-face services. The agency also lost about 1,600 workers last year who can’t be replaced due to a hiring freeze.

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.

Here’s the real Social Security Ponzi scheme

Gov. Rick Perry wants to have a conversation about means-testing entitlements. This is a softer, gentler version of the governor’s earlier assertions that Social Security is an un-Constitutional Ponzi scheme.

And Perry is hardly the only conservative floating the idea that wealthy seniors should get less Social Security — or none at all.

Last week, we looked at the means testing of Medicare, where wealthy seniors have paid higher premiums for nearly a decade. Now, let’s get going on that conversation about means testing Social Security — starting by untangling some badly twisted political language.

The phrase “means testing” has always referred to a measure of financial adequacy to determine eligibility for welfare — that is, a test of inadequate means or poverty — not wealth. That’s an important distinction because Social Security’s retirement and disability programs aren’t welfare at all — they are entitlement programs that we pay into, and they are made available to seniors up and down society’s spectrum of wealth.

Just to be clear, when I talk about Social Security as an entitlement, I’m referring to the Old-Age, Survivors, and Disability Insurance program (retirement) and also the disability insurance program. In order to qualify for either, you must have paid FICA taxes into the system and worked long enough to be eligible. (Note to Social Security conspiracy theorists: Yes, I know about Supplemental Security Income, which is run by the Social Security Administration and doesn’t require beneficiaries to have paid into the system; instead, it relies on general tax revenue to assist the disabled, blind and some elderly who have little or no income to meet basic needs for food, clothing etc.)

Perry and others who hope to take down Social Security like the phrase “means testing” because it sounds so much more reasonable than calling Social Security a Ponzi scheme (which it is not) or a “bad disease,” the description Perry used in his recent book Fed Up! Our Fight to Save America from Washington. That book gives us Perry’s full-blast view of Social Security:

Social Security is something we have been forced to accept for more than 70 years now. Because of that, as Nobel laureate economist Milton Friedman wrote, the program is one of those things on which the tyranny of the status quo is beginning to work its magic. Despite the controversy that surrounded its inception, it has come to be so much taken for granted that its desirability is hardly questioned any longer.

And there stands a crumbling monument to the failure of the New Deal, in stark contrast to the mythical notion of salvation to which it has wrongly been attached for too long, all at the expense of respect for the Constitution and limited government.

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.

Perry’s monstrous lies about Social Security

Gov. Rick Perry, the GOP presidential candidate who calls Social Security a “monstrous lie” and a “Ponzi scheme” has implied that future retirees can’t rely upon receiving benefits from the system.

Not only is Perry shooting wildly from the hip on these statements — a strategy cynically designed to attract angry, younger independent voters — he’s spewing some layered falsehoods that need to be addressed.

Social Security can not only be preserved for future generations, its coming fiscal shortfalls can be fixed relatively simply. What Perry also neglects to mention is that it’s one of the most successful anti-poverty programs in U.S. history.

The before-and-after Social Security picture is dramatic. Before Social Security, almost half of elderly Americans had income below the poverty line, reports the Center on Budget and Policy Priorities. Roughly 12 percent of elderly citizens are considered poor today. The program lifted more than 11 million out of poverty — more than 60 percent of those were women.

Here’s some even more relevant Texas-sized context: Today, more people are slipping back into poverty because of permanent job losses, recessions, a housing meltdown, stock-market downturns, reduced employment benefits, higher medical costs and stagnant wage growth. The U.S. poverty rate last year increased for the third straight year — the highest it’s been since 1993. Some 46 million have annual incomes below the poverty line of $22,113.

As the U.S. is saddled with the highest poverty rate among industrialized countries, why are the anti-poverty features of Social Security being attacked?

Behind Perry’s venom about the system is a larger truth that he’s yet to illuminate: Making cash-strapped states responsible for replacing Social Security or privatizing it is unrealistic. There is nothing in the private sector — nor is anything likely to emerge — that could replace Social Security at the same low cost to taxpayers.

Would Obama’s payroll tax cut hurt Social Security?

The Congressional Super Committee hasn’t even started cutting Social Security, but advocates are already expressing concern on a different front: the payroll tax cut extension proposed last night by President Obama as part of his jobs plan. Those payroll taxes fund the Social Security program.

The President asked for a $175 billion one-year extension and expansion of the employee payroll tax holiday now in place, halving the tax rate to 3.1 percent in 2012. He also proposed halving employer payroll taxes to 3.1 percent for the first $5 million of payrolls in 2012. The president also wants a complete payroll tax holiday that would apply when companies grew their payrolls by up to $50 million in a year by hiring  new workers or raising the salaries of existing workers.

These cuts in the Federal Insurance Contributions Act tax (FICA) may be one of the best available stimulus options in the current political climate, and they will have a positive economic impact. An analysis by The Center for Budget and Policy Priorities notes that the cuts already in place make a substantial difference in the spending power of middle class families, and that allowing them to expire at this time would be very negative for growth:

Failure by Congress to extend the temporary payroll tax cut enacted last December would reduce all paychecks starting on January 1, withdrawing needed support from the still-weak economy. The measure, part of the tax cut-unemployment insurance deal between President Obama and Republican leaders, reduces the employee share of the Social Security payroll tax, boosting workers’ take-home pay by an estimated $120 billion in 2011. The tax cut is worth $934 to the average worker.

And Moody’s Analytics estimates that allowing the payroll tax cuts to expire would reduce GDP growth by one percentage point in 2012, translating into one million fewer jobs by the end of next year.

But Social Security advocates worry that these temporary payroll tax cuts will never be restored. “The problem is, it is very easy in our current political climate to cut revenue and very hard to increase it,” says Nancy Altman, co-director of the Strengthen Social Security coalition and author of The Battle for Social Security, an excellent history of the program and its politics.

“Look at the controversy over ending the Bush tax cuts, which would only affect a small portion of taxpayers,” Altman says. “In this case, if you propose restoring the payroll tax down the road, you’d have to double the rates on workers making minimum wage. This is being sold as temporary, but it’s not likely to work out that way.”

5 easy pieces of Social Security advice, information and trivia

Why has Congress raised the Social Security full retirement age but not the early age? Why don’t we fix Social Security’s finances by cutting administrative overhead? Why do Social Security numbers have nine numbers and what do the numbers mean? Who got the first Social Security card?

I get a constant stream of questions about Social Security — no surprise, since benefits are the most important source of income for most retirees. In fact, new data from the Social Security Administration shows benefits accounted for 38 percent of total income for Americans over age 65 and older in 2009 — up from 30 percent in 1962.

The flow of questions picked up speed after I published a primer on the program in the September issue of AARP Magazine. Here are some of the Qs along with my As . . . along with answers to a few questions I wish readers had asked, but didn’t.

Q: They have raised the retirement age for Social Security from 65 to 67 and now want to raise it to 70. Can anyone explain to me why haven’t they raised the minimum retirement age (62) to keep up with the maximum retirement age? Would raising the minimum age to keep it within three years of the maximum help to keep Social Security solvent longer?

A: Social Security’s Normal Retirement Age (NRA) is increasing gradually from 65 to 67 under reform legislation passed in 1983. Lawmakers kept the early retirement age at 62 to continue giving workers a choice to retire early, even though they would receive a proportionally smaller benefit as the retirement age increased.

Monthly Social Security benefits are reduced when you take early retirement. When the full retirement age was 65, the amount of the reduction for taking benefits at 62 was 20 percent; now that the age is 66, the amount of the reduction is 25 percent. When the full retirement age hits 67, the reduction will be 30 percent. The purpose here is to assure that someone filing at age 62 receives about the same in lifetime payments as someone who files later in life.

Keeping 62 as the early retirement age enables workers employed in physically-demanding jobs to retire without having to apply for disability benefits. In fact, proponents of increasing the early retirement age usually feel compelled to include some sort of mechanism to accommodate manual laborers who are no longer able to perform their past employment but are not impaired enough to qualify for disability.

Why 401(k) plans will fall short for most Americans

It’s time to end the fraudulent notion that 401(k)-type plans are adequate retirement vehicles for most Americans.

They fall short in so many ways, but mostly because they’re too expensive, are exposed to excessive unhedged market risk, poor allocation and contain no income guarantees. There is a better way: Congress can fix the problem while boosting private investment.

With the latest market rout, it’s hardly surprising that most Americans say they are “not where they need to be” on retirement saving. Most are behind after two recessions, two market crashes and yet another downturn.

While most 401(k) balances rose over the past two years, more employees than ever before have taken out loans against their major source of retirement funds. The ever-worsening economy has forced Americans to treat their 401(k) balances like piggy banks.

Should future retirees be consistent hostages to market conditions, praying that a rebound in stocks will help fill the gap?

Since there’s no guaranteed, inflation-adjusted annuity incorporated into 401(k)s — regular monthly payments that rise with the cost of living — it will be difficult for future retirees to attain a dignified lifestyle. They will also be fully taxed on all withdrawals for conventional 401(k)s (Roth accounts’ payments are generally tax-free), so the biggest tax hits may be yet to come.

The 401(k) doesn’t work on a large scale because it exposes nearly every participant to market risk that can’t be fully hedged.  No one can consistently predict market cycles and less than half of employers offer personal planning services that offer meaningful guidance to protect you from the pitfalls of market investing.