Social Security recipients are projected not to receive a benefit increase for 2016. However, for high income individuals and couples, they may actually face a net benefit decrease, due to a huge potential increase in Medicare premiums. The projected Social Security wage base for 2016 would remain the same, at $118,500, but the Medicare portion of payroll taxes would continue to apply to all wages. The .9% Medicare surtax would apply to wages over $200,000 for single files and $250,000 for joint returns.
The Social Security Administration will officially announce the changes for 2016 in October. Early projections indicate that there will be no Social Security COLA (cost of living adjustment) increase for 2016. COLA changes are based on Consumer Price Index (CPI) data. CPI, or the inflation rate, is negative for the first two quarters of 2015, mostly due to the huge decline in gasoline prices. Since COLA changes to Social Security benefits were introduced in 1975, only in 2010 and 2011 has there not been a COLA Social Security benefit increase.
Social Security trustees project a 3.1% COLA benefit increase for 2017. We are not sure how this can be predicted at this point, so we are not sure how reliable this projection is.
Of significant importance to high income retirees, individuals with Modified Adjusted Gross Income (MAGI) over $170,000 for couples and over $85,000 for individuals, are potentially facing a 52% increase in their Medicare Part B premiums for 2016. MAGI is your annual gross income plus municipal bond interest.
There are 5 Medicare premium brackets, based on your income level. The top premium surcharge is $230.80 per month, per person, in addition to the standard of $104.90. A high income couple would currently be paying $671.40 per month, as a monthly deduction from their 2016 Social Security benefits. If the projected increase is approved by Department of Health and Human Services in October, their Social Security benefits would remain the same but their net deposit would decline by over $100 per month due to the Medicare premium increase.
The reason for this huge Medicare premium increase is that the Social Security Act protects about 70+% of the people considered lower income Social Security recipients from Medicare increases when there are no offsetting COLA increases. For these people, their net benefits (Social Security benefits and Medicare deductions) are not allowed to decline.
Thus, for the approximately 25-30% of the Social Security recipients who earn the most, they will be absorbing the increased Medicare burden for all Medicare beneficiaries. The Secretary of Health and Human Services Department may possibly intervene and set a lower Medicare premium, to be announced in October.
These premium increases do not impact those who begin to collect Social Security in 2016 or those who have enrolled in Medicare, but who have not yet started to collect Social Security benefits.
There is not any planning which can be done to avoid the impact of the Medicare premium increase, as it is based on past income tax returns. If you have not yet begun to collect Social Security and are nearing the age which you can begin to collect Social Security (62-70), you may want to contact us to discuss this important decision.