One of the most important spending factors to take into account when planning for retirement is the cost of healthcare, including the cost of health insurance. Most people are generally aware that their employer picks up a large portion of their health insurance premium costs, but it’s not until you stop working and that goes away that you realize exactly how much that portion was. While health insurance costs have been going up for quite a while now (typically by much more than inflation), since the employer has typically picked up most of that increase, the true increase often doesn’t resonate with folks.
But once you are paying those premiums on your own, you have to cover the entirety of those yearly increases and that can be an unexpected increase in spending for some folks. This is especially true if you retire before age 65, since health insurance before you are on Medicare is much more expensive. This year, however, many folks 65 and older will see a much larger increase in their Medicare premiums as well, clocking in at a 14.5% increase (from $148.50 to $170.10 per month) for the majority of Medicare recipients (individuals with income less than $91,000, married filing jointly with income less than $182,000). The deductible for Medicare Part B also increased by $30.
According to the Centers for Medicare & Medicaid Services, there are three main reasons for the large increase:
- Higher prices for the delivery of health care to Medicare enrollees and increased use of the health care system, some of which is attributed to spending trends driven by COVID-19.
- Previous Congressional action to significantly lower the expected Part B premium increase for 2021 to under $4 a month (it would have been $15.60 otherwise); CMS is required to “pay back” this reduced premium over time, beginning in 2022.
- Money that has been set aside in CMS reserves in case it is decided that Medicare will cover Aduhelm, a new Alzheimer’s drug that has now been approved by the Food and Drug Administration (FDA) and whose annual price has been estimated at $56,000.
The “good” news is that for those receiving Social Security, the cost-of-living increase will be 5.9% this year, meaning the average Social Security benefit will increase by $94/month, more than covering the $21.60 increase in Medicare premiums (for the average beneficiary; of course folks who receive a lower than average Social Security benefit will not see as large of an increase in nominal dollars). Of course, the COLA is due to an increase in inflation, so it’s hard to tell the end result on spending power on retirees.
But it’s important to realize that for those public employees who participate in a pension plan that does not contribute to Social Security (like Colorado PERA), they will not be seeing that 5.9% COLA. Many pension plans are currently not paying a COLA at all or, if they are, the COLA is much lower. For example, Colorado PERA benefit recipients (after a three-year waiting period from when they start receiving benefits) will receive a 1% increase in July of 2022, not 5.9%. The average PERA monthly benefit is $3,178, so that means an increase of $31.78 (which still covers the Medicare premium increase, but just barely, and certainly results in less spending power when accounting for inflation).
Luckily, for PERA retirees 65 and older who are on PERACare (Medicare Advantage plans available through PERA that provide additional coverage above and beyond standard Medicare), PERA was able to negotiate lower premiums this year. Depending on which plan they are on, premiums for 2022 will decrease between $29 and $117 per month! So, when combined with the $21.60 increase (for most folks) in Medicare premiums, PERA retirees will be in relatively good shape this year (despite the lower COLA). (Note: for PERA retirees younger than 65, premiums increased by $38 to $67 per month, although see this post about possible savings by using the healthcare exchange instead of PERACare if you are under age 65.)
There could be some additional good news, as the current version of the Build Back Better Act includes some limited ability for Medicare to negotiate some prescription drug prices as well as a cap on the cost of insulin. These benefits, however, are much lower than in the original bill, which would have allowed Medicare to negotiate all prescription drug prices, and we will have to wait to see if the Senate alters the bill in any additional ways that might affect the Medicare changes.
So, even if you are not yet retired, these are issues you need to start thinking about. And when there are political debates around these topics, try to keep in mind that it’s not just “philosophical”, but the legislation that results has real impact on real people.
Fisch Financial 