Great news. Approximately 70 million Americans will see a 5.9% increase in their social security payments in 2022. But hold on, even more Americans will get a 14.5% increase in their Medicare Part B premiums in 2022. And, since Social Security subtracts the Medicare premium from the gross Social Security amount in the payment to the recipient, many people 65 and older will get a surprise when they get their statement in December of payments they can expect in 2022. It will not be a 5.9% net increase.
The Social Security Administration (“SSA”) is quite busy these days. Not only are they updating 2022 payments for those currently receiving social security and Medicare benefits, but they are also updating the social security benefit statement estimates. For those 60 and over, social security will raise its base monthly amount by the 5.9% and then use a 2% cost-of-living adjustment (“COLA”) for estimates of monthly amounts that might be expected at age 62, full retirement age (“FRA”) (currently age 66 to age 67), and at age 70. Once the FRA estimate is obtained then the age 62 and age 70 are easy. Age 62 will be a 25%- 30% reduction from FRA and age 70 is a 32% increase over FRA. The decision of when to start social security is a huge one. It can mean a huge difference of hundreds of thousands of dollars over 20-40 years of retirement. You should talk with a wealth manager like DWM before deciding which is best for you.
Medicare premiums are generally based on the Adjusted Gross Income (“AGI”) from two years earlier, with a sliding scale designed to have higher income taxpayers pay a larger amount into Medicare. The reason two years is used is simple. By October of 2021, the IRS, and therefore the SSA, has your final 2020 income tax return and can therefore use that to determine what bracket you are in for your Medicare Part B premium. For a married couple, if their 2020 AGI was less than $182,000 then they pay the standard 2022 premium of $170.10 each per month. Bracket #2 from $182,000 to $228,000 is a $238.10 premium. Bracket #3-up to $284,000-is $340.20. Bracket #4-up to $340,000-is $442.30. Bracket #5-up to $750,000-is $544.30. Above $750,000 AGI is $578.30. Again, all of those amounts are up 14.5% from 2021 premiums.
Let’s look at the possible net impact on 2022 payments for two couples. For 2021, both had a total of $4,000 monthly gross Social security payments and one couple paid the standard/minimum premium each in 2021 and the other couple paid premiums based on bracket #4 in 2021. That would mean that each month the first couple would have received a total of two net checks totaling $3,704 ($4,000 gross less $148 premium x 2). The second couple received net checks in 2021 of $3,228. For 2022, assuming both couples continue in their current brackets, couple #1 would get $3,896 ($4,236-$476) total and couple #2 would get $3,352 ($4,236-$884). Couple #1 got an overall increase of 5.2%. Couple #2 got an overall increase of 3.8%. (Note: Premiums for Prescription Drugs-Part D, typically fairly small, are not included here).
Here’s another important fact about Medicare premiums. There are circumstances when you can apply for a lower premium than one based on your AGI two years prior. The SSA calls these “Life-Changing-Events.” If you qualify, your Medicare premium will be based on your estimate of your AGI in the year in question, not the AGI from two years ago. These events include marriage, divorce, death of a spouse, work stoppage or reduction, loss of income-producing property, loss of pension income, and employer settlement payment. The event that we have seen the most is retirement, aka work stoppage or reduction. When this occurs, the SSA recognizes that the income of that individual or couple will likely not be as large as two years earlier. A SSA Form 44 is used to state the facts, provide evidence (such as a letter from the past employer) and provide the Estimated Adjusted Gross Income for the current year. The adjustment to the premium can be up to $400 per month for each member of the couple in Medicare. This can amount to a savings of almost $10,000 per year for one or two years, depending on the circumstances. We have helped individuals and couples assemble and file these applications and receive significant reductions in their premiums.
One last point. The loss of income-producing property comes up often. When taxpayers sell a building or a property and receive a large capital gain on the sale, that certainly can create a big bump in AGI. However, the word “loss”, as we have confirmed with SSA officials, means an economic loss, e.g. loss of property due to arson, loss of investment property due to fraud or theft, or destruction of crops or livestock due to natural disaster or disease. This exception does not apply to the ordinary sale of property. Hence, two years after the sale, the taxpayers can expect a one year bump in Medicare premiums.
Social Security and Medicare are a big part of most Americans’ retirement years. It’s important to stay up to date on Social Security and Medicare rules and opportunities. It’s another reason you should be working with a total wealth manager like DWM who is knowledgeable and experienced in these matters and can help you review the options and identify the best courses of action for the future. Please call or email if you need assistance.