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By Al Chingren - November 7, 2017
In Part 1 of this series, we went on a journey to discover how some factors and decisions you face could reduce your Social Security benefits in retirement. Those included filing early, claiming a lump-sum benefit, earning wages while claiming, and working for an employer that didn't pay into the system.
In this conclusion, we'll review three more ways that could lead you to "Reduction Junction." As I noted before, certain decisions could lead you to that destination permanently. It's important to know your options before filing your claim.
For most retirees, Medicare Part B (and potentially Part D) premiums are subtracted directly from ongoing Social Security payments. Both Social Security benefits and Medicare premiums have their own annual inflation adjustments. Medicare healthcare inflation is usually higher than general inflation adjustments most years.
Depending on your Medicare benefits and how two key inflation provisions work together, it could impact your benefits. Designed to smooth out cash flow for retirees, when combined, the rules below can sometimes cost them.
The first provision stipulates that if inflation is negative, Social Security's Cost of Living Adjustment (COLA) can never be negative. It has a floor of 0.0 percent.
The second provision is the Hold Harmless rule. It states that Social Security payments cannot decrease due to rising Medicare Part B premiums. Hold Harmless protects about 70 to 75 percent of Medicare enrollees. At worst, the IRS caps the Medicare premium increase at the dollar amount of the COLA increase.
But here's where it can go south for some. In 2016, the Social Security COLA was 0.0 percent. The two rules working together means that the Medicare Part B premium increase could not be applied to the over 70 percent of Medicare enrollees who are eligible for the Hold Harmless provision.
That resulted in the remaining roughly 25 percent of Medicare enrollees, not protected by Hold Harmless, bearing the full responsibility of the Medicare premium increase. And they could see a spike in their Medicare Part B premiums.
Most lifelong workers understand having taxes withheld from their income. However, retirees may not realize the possible tax implications on their Social Security benefits. A couple with a combined income between $32,000 and $44,000, may have 50 percent of their benefits subject to their regular tax bracket. The tax rate rises to 85 percent if they earn more. To ease the burden, you can ask the Social Security Administration to withhold federal taxes from your benefits when you apply.
Private creditors can't touch Social Security, but federal agencies can garnish the benefits. Child support, alimony, back taxes and non-tax owed to federal agencies (home and student loan default) can reduce Social Security checks. The federal government is increasingly taking money out of Americans' Social Security checks to recover millions in unpaid student debt. As more baby boomers retire, this trend could accelerate.
Since 2001, the government has collected about $1.1 billion from Social Security recipients of all ages for unpaid student loans. That include $171 million last year as reported by the Government Accountability Office (GAO) in December. Of the 2015 affected recipients, 114,000 were age 50 or older and receiving disability benefits. About 38,000 were above age 64. The typical borrower lost about $140 a month.
The GAO report highlights the sharp growth in baby boomers entering retirement with student debt. Most retirees borrowed years ago to cover their own educations, but some used the loans to pay for their children's schooling. Overall, about seven million Americans age 50 and older owed about $205 billion in federal student debt last year. About one in three were in default, raising the likelihood that garnishments will increase as more boomers retire.
Number of Americans whose Social Security checks were garnished due to unpaid federal student-loan debt.
Source: Government Accountability Office. Fiscal year ends September 30.
Your Social Security decisions should include a review of your retirement goals, longevity, and sources of income. Some things like Medicare premiums and tax brackets can be optimized to a degree. Understanding your options will improve the decision process but ultimately, delaying collection may be the best way for individuals to boost their lifetime benefit and overall retirement income.
Contact us to discuss your retirement plan or take advantage of our online Retirement Planner to find out how Social Security fits into your overall retirement income picture.
Take advantage of our online Retirement Planner to find out how Social Security fits into your overall retirement income picture.
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The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.