20 Dec 20210 Comments
Talk with almost any person you meet about Social Security and, more often than not, they’ll comment that the program will probably go broke, and the money won’t be there for them.
How did we get here? Simply put, Social Security has run through its Trust Fund reserves because, for years, it paid out more than it received. This issue has existed since the onset of the program as those who initially received benefits were paid far more than what they paid in. Since then, Social Security has been playing catch up to generate the necessary money to continue the program.
The good news, though, is even with what appears to be an uphill battle when it comes to Social Security, thanks to program changes made by Congress, it should be fine.
How could Social Security be fine?
The reason Social Security is not going broke is that Congress has taken measures over the last two decades to ensure the program will have plenty of reserves to last for quite some time.
This is where the bad news comes in and why you need to start planning for every aspect of retirement now – because it comes at your expense.
The measures from Congress that will save Social Security at your expense are:
1. To receive any Social Security benefit, you must also enroll into Medicare Part A when you become eligible [for Medicare] at age 65.
2. Failure to enroll into Part A, by law, results in the immediate forfeiture of any past, current and future Social Security benefits you are entitled to, with one exception: if you are 65 or older and have creditable health insurance through an employer or spouse’s employer, you can defer your enrollment into Medicare.
3. If your income exceeds certain levels, there may be an added surcharge, Income Related Monthly Adjustment Amount (IRMAA), to your Medicare Part B and Part D premiums.
Keep in mind that both Part B and D are optional, but they do have late enrollment penalties if you delay in signing up for them and you do not have existing “creditable coverage.” To determine the IRMAA surcharge, Medicare can look back two years.
4. The income that determines IRMAA is defined as your adjusted gross income plus any tax-exempt interest you may have. For tax year 2020, this income is reflected on lines 2a and 11 of the IRS form 1040. If your income fluctuates year to year, you may move between IRMAA brackets, and you may need to advise Medicare to that if they continue to deduct more than you are required to pay.
Some examples of income that count towards IRMAA are: Social Security benefits (your taxable portion), wages, pension and rental income, capital gains, dividends, and any distributions from tax-deferred investments like traditional 401(k)s and traditional IRAs.
5. The bulk of your Medicare premiums as well as any IRMAA surcharges are automatically deducted from any Social Security benefit you may receive.
How Congress is saving the Social Security program through Medicare premiums
If Medicare premiums increase faster than Social Security benefits, the result will be lower and lower payouts to Social Security beneficiaries each year. Using this strategy, the financial burden on Social Security lessens with each Medicare increase – coming at the cost of your Social Security benefit.
According to the 2020 Annual Report of the Medicare Board of Trustees (MBT), the premiums for Medicare are projected to grow at over 6.2% annually for the next eight years.
Unfortunately, according to the Annual Report of the Social Security Board of Trustees, during this exact same time period, the cost-of-living adjustment (COLA) is projected to be no greater than 2.4% annually. The COLA is the annual increase to Social Security to keep up with inflation. And over the last 10 years, it has only averaged 1.65% annually.
Based on these projections, ultimately, every time your Social Security benefit is projected to increase, your Medicare premiums will more than consume that increase. The result: the obligation Social Security has in paying benefits is reduced by increased Medicare premiums.
To illustrate further:
Person A is 60 years old today, planning to retire at 67 in 2028, and resides in the state of New York.
If she has earned an average annual salary of $75,000 while working, her Social Security benefit at 67, according to Social Security’s Quick Calculator, is projected to be $30,744 for the year.
In 2028, according to the MBT Annual Report, her Medicare Part B and Part D premiums are projected to cost $4,154 for the year. As a result, her Medicare premiums will consume roughly 13.5% of her Social Security benefit.
But remember Medicare is inflating twice as fast as your Social Security benefit!
By age 75, her Social Security benefit, with that 2.4% COLA, is projected to be $37,167 while her Medicare premiums will total $6,792. Her Medicare premiums will consume about 18.3% of her Social Security benefit.
At age 85, her Social Security benefit is projected to be $47,115 annually if the COLA remains at 2.4%, and her Medicare premiums will exceed $12,500 for the year. At this point, Medicare will consume more than 26% of her expected Social Security benefit.
On the lower left (facing page) is a graph from IRMAA Solutions’ Medicare Planning Calculator, illustrating how Medicare bites into her Social Security benefit at an increasing rate (without accounting for any IRMAA surcharges).
How does IRMAA impact you?
Again, IRMAA is a surcharge on top of your Part B and Part D premiums, based on your adjusted gross income plus any tax-exempt interest.
Because of this law, your taxable portion of Social Security benefit plus any money you withdraw from your traditional 401(k) or traditional IRA is used against you when your Medicare premiums are being assessed.
Example: You are retired, receiving Social Security benefits and enrolled into Medicare. You decide to make a withdrawal from your 401(k), which will be taxed. That withdrawal plus your Social Security benefit and any other income you may have such as wages will be added up. If the amount is higher than $88,000 for an individual or $176,000 for a couple in 2021, you will be subject to at least a 40% increase in your Medicare premiums.
And remember, by law, IRMAA surcharges are automatically deducted from your Social Security benefit too.
If we take the prior example of Person A who is receiving $32,704 in Social Security benefits at age 67, and assume she reaches the first IRMAA bracket, Medicare will consume 13.5% of her Social Security benefit.
By age 75, the percent Medicare consumes of her Social Security grows to 23.7% and at age 85 the percent is just under 35%. And instead of receiving over $52,000 in Social Security benefits at age 90, her Medicare premiums and IRMAA will eat up 40% of her Social Security benefits, leaving her only with about $31,000. That is over $20,000 that Social Security does not have to pay out.
To highlight just how much Social Security will be saving when it comes to its obligation in paying benefits, below is a graph for someone who is in the highest IRMAA bracket and earns the largest amount of Social Security benefits in a year. You can see how this person will have declining benefits (the green line) as she ages in her 80s.
So, is Social Security really going broke?
Again, due to the federal laws passed by Congress, the likelihood of Social Security going broke is minimal at best. The only problem: you may not get what you expect, no matter how much you paid into the system.