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Whether you realize it or not, senior citizens and soon-to-be retirees are facing not one, but two major concerns during their golden years.
First, as you're likely well aware, the Social Security program is expected to burn though its more than $2.8 trillion in spare cash by the year 2034. The latest Social Security Board of Trustees report suggests that the program's cash inflow is forecast to switch to a cash outflow by the year 2020, leading to what could be up to a 21% cut in benefits by 2034.
However, an even more immediate problem exists with Medicare's Hospital Insurance Trust. It's set to deplete its spare cash by the year 2028, two years earlier than the Trustees had forecast in their previous report. If this spare cash is depleted, Medicare would become a budget-neutral program, meaning the only money being dispersed to physicians and hospitals would be the money being collected via payroll taxes, and not a penny more. The expected reimbursement cut for physicians and hospitals is estimated at 13% if Congress doesn't take action.
Rising branded prescription drug costs, coupled with more expensive surgical procedures, has put an increasing amount of strain on the program designed to protect seniors from financial ruin caused by medical expenses.
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Kiss those Social Security benefits goodbye
And there's a new worry creeping into the picture that affects both of these troubled programs.
According to a recent survey conducted by The Senior Citizens League (TSCL) of seniors who are both Social Security and Medicare recipients, 41% of respondents spent more than a third of their Social Security benefits on Medicare premiums for Part B (outpatient services), Part D (prescription drug coverage), and out-of-pocket expenses in 2015.
What was particularly notable about TSCL's study is just how rapidly Social Security benefits are being eaten up by healthcare costs. In 2013, TSCL's survey noted that just 12% of seniors spent more than a third of their benefits on healthcare costs. By 2015, this figure had more than doubled to 29%.
It would also appear that the government is blind to just how quickly Medicare costs are rising. The 2016 Medicare Board of Trustees report estimates that about a quarter of Social Security benefits are set to be used to pay for Medicare Part B, Part D, and out-of-pocket expenses in 2016, with this percentage increasing to approximately one third by 2090. Yet it would seem that we're nearly at a third right now!
TSCL has clear concerns about seniors being able to maintain their standard of living in retirement, with 61% of current beneficiaries, per the Social Security Administration, currently reliant on Social Security to supply at least half of their monthly income.
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Ways you can reduce your Medicare costs
This latest study from TSCL is indicative of the need for seniors and pre-retirees to have a plan in place to reduce their Medicare expenses come retirement. Here are a few things seniors and/or pre-retirees can consider doing to help reduce the burden of Medicare expenses on their current or future Social Security benefits.
First of all, I strongly urge Medicare beneficiaries to shop around for prescription drug coverage. Although Medicare Part A (hospital insurance) and Part B are one-size-fits-all packages, Part D plans are offered by contracted private insurers. This means you have choices when selecting the plan that best suits your needs. Keep in mind that the cheapest plan may not be the best plan for you. Instead, look at which plans cover the prescription drugs you take, and then focus your efforts on cost. It also doesn't hurt to look into national-, state-, or manufacturing-based assistance programs, which could lower what you pay out-of-pocket for prescription drugs.
Seniors should also do their homework to decide if a Medicare Advantage plan (also known as Part C) is right for them. Original Medicare remains the choice of a little more than two-thirds of seniors, but between 2005 and 2015 the number of seniors choosing to enroll in a Medicare Advantage plan soared from 13% to 30%. The clear advantage of a Part C plan is that it tends to be simpler, with Part A, Part B, and Part D coverage rolled into one plan, as opposed to enrolling in each plan separately as with original Medicare. Medicare Advantage plans also have maximum annual out-of-pocket costs (not including prescription drugs), which can be beneficial to seniors with chronic or serious health conditions. Original Medicare has no annual out-of-pocket limit.
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Medicare beneficiaries should also consider spending more now to save more later. Once again, if you're more liable to visit the doctor because of a serious or chronic medical conditions, and you've chosen an original Medicare plan, it could be worthwhile to look into a supplemental insurance plan to reduce your out-of-pocket expenses. A supplemental plan would indeed bulk up your initial premiums, but the subsequent reduction in out-of-pocket expenses could more than pay for the added insurance.
Finally, and this is primarily for those of you who've yet to retire, ensure that you have alternative sources of income in place beyond just Social Security. The absolutely best alternative in this respect is a tax-advantaged Roth IRA. Investment gains in a Roth IRA aren't taxable over the life of the account as long as you make no unqualified withdrawals. This point is particularly important because it means Roth IRA withdrawals don't count toward your annual income, regardless of how much you take out per year after age 59-1/2.
Medicare Part B and Part D have surcharges attached when earned annual income crosses $85,000 for an individual. This means that while a 401(k) and/or Traditional IRA are great for providing alternative sources of income beyond Social Security during retirement, what you withdraw will be counted toward your annual income and taxed, and it could push your income into surcharge territory, or cause your Social Security benefits to be taxed. Roth IRA withdrawals won't affect your annual income, perhaps saving you from Medicare surcharges or having your Social Security benefits taxed.
Consumers can't stop drugmakers or hospitals from raising their prices, but actions can definitely be taken to reduce what you'll pay for medical expenses during retirement. Taking action now could leave you with more of your Social Security income than you initially expected.
