(The opinions expressed here are those of the author, a columnist for Reuters.)
By Mark Miller
CHICAGO, May 18 (Reuters) - Delaying your Social Security benefit as long as possible is a great way to boost retirement income, but the strategy comes with one built-in downside. Most seniors enroll in Medicare at 65, but those who are not yet receiving Social Security run the risk of much larger annual increases in their Part B premiums.
Healthcare inflation is resurgent, and more retirees are delaying their Social Security claims. So that leaves a question: how significant is the risk of higher Medicare costs, and does it ever justify an earlier-than-planned Social Security claim?
In most cases, the risk is small, and the benefits of a delayed filing far outweigh the higher healthcare costs. I asked Social Security Solutions, one of the leading Social Security optimization services, to run scenarios for hypothetical couples. We found that the net drag is modest - anywhere from 4 to 6 percent of the higher Social Security benefit gained through delay.
“Delaying your benefit is more than likely worth paying the hold-harmless penalty,” said Robin Brewton, vice president of client services at Social Security Solutions. “It’s important to run your own numbers, because everyone’s scenario will be different, but in most cases it won’t make sense to claim earlier to protect yourself from higher Medicare costs.”
More on Brewton's calculations in a minute, but first a bit of background.
Gauging The Risk
Medicare enrollees pay 25 percent of overall program costs through premiums. Changes in the Part B premium costs paid by enrollees are tied at the hip to Social Security’s cost-of-living-adjustment (COLA), which is awarded annually using a formula tied to the economy’s general inflation rate.
By law, Part B premium changes cannot exceed the COLA - a feature designed to ensure that net Social Security benefits do not fall. The rule prevents the dollar increase in the Part B premium from exceeding the dollar increase in Social Security benefits.
The “hold harmless” provision protects about 70 percent of the Medicare population from the full weight of healthcare inflation - that is, those enrolled in both programs. But occasionally, the hold-harmless rule can burden the remaining 30 percent of Medicare enrollees with very large premium hikes. That includes anyone delaying their filing for Social Security benefits, but others affected include some federal and state government retirees. Affluent seniors who pay high-income Medicare premium surcharges also are not protected.
The premium spikes occur in the rare instances when COLAs are very low or flat - but that is precisely what has happened over the past two years.
No COLA was awarded in 2016, and the 2017 COLA was 0.3 percent. This year, the monthly Part B premium rose 10 percent to $134, but the hold-harmless provision kept the average increase to $109, an increase of just $5. (With inflation running a bit higher this year, a normal COLA is more likely for 2018.)
Social Security benefits are calculated using a formula called the Primary Insurance Amount (PIA). Although you can claim benefits as early as 62, by waiting until your full retirement age (currently 66), you will receive 100 percent of PIA. Every 12 months you delay beyond that point, until age 70, tacks on an additional 8 percent. And benefits are protected from inflation by the program’s annual cost-of-living adjustment.
Tradeoffs of a Later Claim
Relatively few eligible seniors delay their Social Security claim - just 6.1 percent of men, and 6.5 percent of women, claimed at age 67 or higher in 2015, according to the Social Security Administration. But their ranks are getting larger.
For those who do delay, Part B premiums rise at the unprotected rate; when you file for Social Security, your premium stays at that level, but it is protected under the hold-harmless clause going forward.
What is the drag on lifetime benefits imposed by the higher Medicare costs? Social Security Solutions ran several hypothetical cases for married couples and single people, projecting total lifetime Social Security benefits using a 2.4 percent annual COLA (the average since 1990) and a consensus estimate on healthcare inflation (4.5 percent). We assumed average mortality (85 for men, 90 for women).
The gain in lifetime Social Security benefit from delayed filing always beat the additional Medicare premium cost. Consider, for example, the hypothetical married couple Martin and Marilyn, who have typical PIAs ($2,400 for Martin, $2,000 for Marilyn). Delaying their filing from age 65 to 70 gets them $253,000 in higher lifetime benefits even after subtracting the higher Medicare premiums. The higher premiums take a bite of roughly 4 percent from their Social Security.
Healthcare inflation remains a serious concern for retirees. Overall Medicare program costs are rising at a faster rate than gross domestic product; the costs are met through a combination of general federal revenue and Medicare premiums.
"The secular healthcare cost trend is worth watching,” said Juliette Cubanski, associate director of the program on Medicare policy at the Kaiser Family Foundation. “And the out-of-pocket cost of Medicare benefits are taking up a larger and larger share of Social Security benefits."
But she agrees most retirees will still find it worthwhile to delay their Social Security filing as long as they can. “Even if you are subject to a higher premium during years when there is no Social Security COLA or a really low adjustment, it will be worthwhile.” (Editing by Matthew Lewis)