The news regarding Social Security and Medicare for 2023 is in — and it’s good news. Social Security is getting its biggest cost of living boost since the 1980s, while the cost of Medicare Part B premiums is going down. To put this in accounting terms, for many retirees, it means “income is up and expenses are down.” If you’re already covered by Social Security and Medicare, you’ll be receiving your notice of the specifics soon.
But before you go off and spend your newfound fortune, realize that the effect these changes will have on your wallet will depend on your personal situation. There are both tax considerations and long-term planning issues to factor in.
Social Security Is Paying More
Benefits for Social Security are annually adjusted to reflect the cost of living (COL). These annual rate changes can vary significantly. For example, in the year 2008, the COL was 5.8 percent, but in both 2009 and 2010, it was 0 percent. The good news is that for 2023, the COL increase is a staggering 8.7 percent. This news is all the more compelling for two additional reasons. First, you don’t have to file for Social Security to enjoy the benefits of this increase. The COL percentage is added each year to the calculation of your primary insurance amount (PIA).
Say you’re 65 years old but want to hold off on filing for Social Security until age 70. You’ll still get the 8.7 percent raise factored into your PIA when you do apply. Whether you file or delay, you enjoy the increase. The second reason this news is so useful is that the COL increase applies for all of 2023, even if inflation itself moderates. The November 2022 data hints at a possible slowdown in inflation, but the government must still credit the 8.7 percent COL to your Social Security next year. This could mean many seniors will experience a boost in their buying power.
Something to keep in mind is the long-term consequences of this huge increase in the COL. Will this big benefit bump hasten the exhaustion of the Social Security trust fund, leading to a decrease in your benefits a decade or more in the future? The Social Security trustees report earlier this year suggested the trust fund would survive until 2034, and at that time, benefits would drop to approximately 76 percent of currently projected benefits. This projection, however, was made before the 8.7 percent COL increase was known. Especially if inflation moderates quickly, this bump may accelerate the depletion of the trust fund.
Medicare Part B Is Charging Less
Last year was an unwelcome surprise for many elderly people covered by Medicare. The 2022 Part B premium went up 14.5 percent because it included a contingency margin to cover spending for a new drug, Aduhelm. Since this Medicare premium is typically deducted directly from the Social Security recipient’s benefit check, many individuals were shocked to discover that their 5.8 percent COL raise was wiped out by the increase in their Part B premiums. This is especially true for more affluent Medicare recipients who are subject to the income-related monthly adjustment amount (IRMAA) penalty. Because of increased Medicare costs, some actually experienced a decrease in their net Social Security monthly payment in 2022 — including me!
For 2023, the news is much better. The standard monthly premium for Medicare Part B enrollees will be $164.90, a decrease of $5.20. The annual deductible for all Medicare Part B beneficiaries is $226 in 2023, a decrease of $7 from the annual deductible of $233 in 2022.
Keep in mind, however, that Part B is only one expense in the many costs related to healthcare coverage for retirees. Medicare Supplement, Medicare Advantage, and Part D drug plan costs all have the potential to cost more. Furthermore, with inflation and supply chain issues, it’s a given that many non-Medicare-covered costs will rise. What retiree hasn’t experienced sticker shock at the price of some over-the-counter drugs?
After-Tax Consequences Are Unclear
There’s a potentially big difference between the before- and after-tax benefits of this otherwise good news about Social Security and Medicare. A complex web of tax interactions makes it astonishingly difficult to model the exact after-tax consequences. Depending on various factors, particularly the recipient’s income, taxes can blunt the positive effects of these benefit improvements.
With Social Security, taxes don’t change, but tax brackets do. How much of your Social Security is taxable is based on income tables that haven’t changed since 1984. The bottom line is that you can have as little as zero or as much as 85 percent of your Social Security benefit subject to income tax. Since these tables are not indexed to inflation, the COL increase in your check may mean that more of your benefit is subject to income tax than in the past.
But taxed at what rate? Tax brackets are indexed to inflation, so in 2023, you’ll be allowed to earn more taxable income before being pushed into a higher marginal tax bracket.
Complicated? Let’s make it more confusing. As mentioned above, there’s an IRMAA premium penalty that causes Medicare Part B (and D) premiums to increase as your income increases. The Social Security COL will potentially raise your modified adjusted gross income (MAGI), exposing more income to the IRMAA penalty. But the income brackets used for determining the penalty are indexed to inflation as well, so it’s tricky figuring out the true tax cost of the COL income bump.
Add in two further challenges. First, the government usually uses your MAGI from 2 years prior to calculate your income; and second, if you are even $1 over the income limit, your IRMAA penalty jumps to the next premium level (which can be as much as a 40 percent increase). Close doesn’t count with this calculation! Tax professionals will tell you that this is an area of retirement planning where it takes not only knowledge but good software to get a handle on the after-tax costs of benefit changes.
Overall, It’s Good News
Enjoy the temporary win. Whether you’re currently receiving Social Security or have delayed filing, you’re getting an attractive raise; one that’s bigger than what some of your working counterparts are getting from their employers. And if you’re on Medicare, the all-important Part B premium is actually going down. Just don’t assume this will necessarily mean big increases in your wallet. Factor in other costs such as taxes and uncovered medical costs first. And don’t assume the good news is a forever thing. Both the Social Security and Medicare systems face daunting funding challenges. Save some of your good fortune today for a rainy day in the future.
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