Social Security and Medicare expert, Andy Landis, spells everything out you need to know before you retire.
Many of us over 50 are going through our retirement checklist. Retirement savings? Check. When to take Social Security? Check. Medicare? Oops. Hmmm. Forgot about that one. If you haven’t learned how Medicare works, you’re putting your entire retirement at risk, says Andy Landis, a Seattle-based author and financial expert on Social Security and Medicare.
While Social Security is the biggest source of retirement income, Medicare may be even more important, Landis says. Healthcare bills can destroy your retirement savings fast. Everyone needs to learn when to apply for it and how to supplement its coverage.
“Everywhere you look there’s another article on when and how to take Social Security,” says Landis, the author of Social Security: The Inside Story, which includes a chapter on Medicare. “But don’t overlook Medicare. Healthcare is the one thing that can annihilate your nest egg. Do it right and you’re fine. Do it wrong and you’re broke.”
Once you’re on Medicare don’t think you’re 100 percent insured. Medicare is designed to pay most of your bills, but everybody is expected to have additional coverage on top of their Medicare.
“It’s like Social Security is a good start on your retirement income, but everybody is expected to have more sources of income such as savings or pensions on top of that,” Landis says. “It’s the same with Medicare and there are several ways to do that.”
Currently, the monthly premium for Medicare is $104.90 a month. That’s for the Part B section of Medicare that covers doctor’s services, which aren’t covered under the Medicare taxes you’ve been paying for your entire working life. Those taxes cover hospital expenses only, Landis says.
There are three pathways to supplement your Medicare.
One is retiree insurance from your previous employer, the government if you’re a former public employee and the military if you retired from the service.
The second option is the Medigap insurance policy designed to cover all or a few of the gaps in Medicare coverage, Landis says.
The third way is Medicare Part C, also called Medicare Advantage plans. That’s for those who don’t want to deal with Medicare and buy private insurance that totally replaces their Medicare. It’s popular in urban areas where there are a lot of choices in Medicare Advantage arena, Landis says.
“That’s the up and coming way to supplement your Medicare,” Landis says. “You buy this Medicare Advantage plan that replaces all of your Medicare coverage, all of your claims go through the private company and all of your appeals go through the private company. The only way you deal with Medicare is they deduct the Part B premium from your Social Security payment every month. Otherwise, you don’t deal with Medicare at all. It’s very popular and a lot of baby boomers are doing it. That’s how it works for workers now. You don’t have to have two or three insurance policies to make your work policy work. You just go to an insurance company and that covers drugs and doctor’s visits and hospital visits all in one package.”
Medicare Advantage plans start at zero premiums. The reason they do that is because Medicare pays them every month for everybody they enroll, Landis says. In an urban area such as Seattle where Landis lives, he says he can opt into several zero premium Medicare Advantage plans or pay $100 to $150 a month more for fancier plans.
Medigap plans, meanwhile, start at $30 a month for the inexpensive ones and run up to about $250 a month for the Cadillac plans, Landis says. In addition, those on Medigap plans need prescription drug coverage that costs on average from $35 to $50 a month, but can range between $10 and $100 a month.
Neither your Medicare nor your Medigaps cover prescription drugs. If you go that pathway, you’ll want to look into a Medicare Part D drug coverage policy.
While Medigap plans can be more expensive than Medicare Advantage plans, people have their reasons for choosing them, Landis says. He compared Medicare Advantage to the systems of our parents in which the TV and stereo where combined into one piece of furniture. The Medigap plans are more like a system where you can specify what you do want in terms of drug coverage and medical coverage, he says.
“You build a component system with the best examples from each,” Landis says. “Let’s say I need a specialty drug for a neurological disorder. The Medicare Advantage packages might be nice, but none of them covers that drug very well. I would pay a lot of out of pocket. But if I go to Medicare Part D drug plans available, I may have found I’m better off specifying those plans.”
If you go the Medigap route, any doctor that takes Medicare in any state would work, Landis says. If you take a Medicare Advantage plan, the downside is it’s going to have a list of doctors that’s in network. If you don’t like their network, you may be better off going to Medigap, he says.
As for Medicare Advantage, by law it has to cover everything Medicare A and B covers, but it has additional coverage. That includes drug coverage, dental, vision, hearing and out-of-pocket maximums that neither Medicare nor most of Medigap policies have, Landis says.
“If I’m looking at an out-of-pocket maximum of $3,000, I feel safe. I’m not going to go broke on what can happen this year,” Landis says.
By having Medicare Part B, Medicare will pay 80 percent of what the doctor is allowed to charge. Patients pay the other 20 percent. Doctors can also charge patients 15 percent above what Medicare does, he says.
“That’s not bad,” Landis says. “Let’s say a doctor charges you $100 for the visit and you have to pay $35. What is terrible is the doctor says he has to do heart surgery on you and it’s going to cost 100 grand and you have to pay 35 grand. That’s real life. That’s why you have a Medigap or a Medicare supplement so there’s no out-of-pocket maximum on Medicare.”
Even though we paid into Medicare on our weekly pay checks to the tune of 1.45 percent of our income, that doesn’t give us the right to refuse to sign up for Medicare once we turn 65. Only if we’re getting insurance through our employer do we have a right to hold off accepting Medicare, otherwise, the government is going to penalize us, says Landis. Retiree plans or COBRA plans don’t exempt you, he says.
“If you’re on a plan from work or on your wife’s plan, you can postpone Medicare without danger,” Landis says. “You can just show them a letter. If not, they hit you for ten percent for each year you should have been on. If you come in at 68, they will hit you with 30 percent increase every month for Medicare for the rest of your life. You don’t want to pay an extra 31 bucks a month if you’re retired.”
By cost standards, Part B coverage is inexpensive because most people by paying only $104.90 a month are paying for 25 percent of its cost, Landis says. The rest, which amounts to $312, is covered by a government subsidy that comes from general tax revenues collected by the government.
While Obamacare provides subsidies to people below certain income thresholds, all income brackets receive a subsidy for coverage of doctor’s services under Medicare. Higher-income people, however, are required to pay more than the $104.90 a month.
The threshold for that is income more than $85,000 a year for an individual and $170,000 for a couple, Landis says. If you’re over that, there’s a sliding scale for monthly premiums that increases to $146.90 a month, $209.80 a month, $272.70 a month and as high as $335.70 per month per person. That top monthly premium is for individuals who earn more than $214,000 or couples who earn more than $428,000.
The reason the government requires people join Medicare at 65 if they don’t have insurance through work comes down to insurance pools, Landis says. If you’re running an insurance company, do you want old and sick people in your insurance pool, which makes costs higher or do you want young and healthy people in the pool?, he asks.
“Medicare is thinking we need to get you in when you’re younger and healthier or our whole insurance pool—the oldest sickest insurance pool in the whole nation—they don’t want the insurance pool to be any more expensive than it already is,” Landis says. “Some people postpone it because they don’t want to spend the money. They would rather be uninsured until they’re sick, and then they want their Medicare.”
The reason why many people with insurance through work keep it rather than switch to Medicare is it’s likely cheaper and better, Landis says. But’s that’s not the case for those in the private insurance market until they’re eligible for Medicare, he says.
“Even if I was in that high-income bracket, it’s much cheaper than what I’m paying now for much worse insurance right now,” Landis says. “I’m 63 and counting the months until I’m 65 to get cheaper and better insurance than what I’m on. If I pay $104.90 for Medicare Part B, then buy a Medigap supplement for $50, and I find drug coverage for $50. I’m out $200. That compares to right now to what I’m paying $600 a month for lousy insurance. My deducible is $10,500.”
Medicare was launched in 1965 to combat poverty among the elderly who had to choose between paying for medical care and food and housing. The program has been a godsend for the elderly since then.
Some have proposed turning the program into one involving vouchers where people would buy insurance on the private market, but opponents say that wouldn’t be enough to cover rising premiums and leave the elderly vulnerable in the future. Without Medicare, insurance would be costly.
“Judging by how expensive insurance gets as you approach 65, it will be much, much more if you were buying into the private market in your 70s and 80s,” Landis says. “It would be outrageously expensive. That’s one of the reasons to have Medicare because if we all go together in a pool and pay for part of it while we’re working and part when we’re retired, that’s the only way to make it affordable for older people. It’s a great deal for us older workers.”
Medicare is even set up to help those elderly people who move here from abroad. If someone moved to the US, they need ten years of work to have free Part A coverage. Otherwise, they can buy it for $426 month and pay $104.90 for Part B like everyone else does, Landis says.
“You don’t even have to be a citizen,” Landis says. “You have to be a legal immigrant. You see it a lot with Canadians who move into the U.S to retire because the taxes are lower. Their Canadian coverage is no good down here, and they can buy Medicare from the government.”
Scouring through Medicare and the plans is complicated, but there’s help out there, Landis says. State insurance commissioners have information available on www.shiptalk.org and the federal government has detailed information on Medicare Advantage and drug plans on www.medicare.gov.
Recipients of Social Security and Medicare don’t have to worry about the federal government reserves running low to fund programs anytime soon.
The Social Security Board of Trustees announced that the Social Security reserves continue to grow for now and won’t be depleted until 2033, the same date projected a year ago.
Medicare Trustees announced that the trust fund that finances Medicare’s hospital insurance coverage has an extra four years of solvency until 2030. A year ago, trustees said the fund would run low in 2026.
The Medicare Part B premium for 2015 will not be determined until later this year, but the preliminary estimate in the report indicates that it will remain unchanged from the 2013 premium for the second consecutive year. Part B covers doctor’s visits, surgery and supplies to treat a condition.
Trustees credited the financial boon in part to cost controls implemented in the Affordable Care Act. It says spending is projected to continue to grow slower than the overall economy for the next several years, which is good news for beneficiaries and taxpayers, says Marilyn Tavenner, administrator of the Centers for Medicare & Medicaid.
Tavenner says it has made progress in improving patient safety, decreasing hospital readmissions, and establishing new payment models such as accountable care organizations aimed at reducing costs and improving quality. During the past four years, Medicare spending growth has averaged 0.8 percent annually, much more slowly than the average 3.1 percent annual increase in per capita GDP and national health expenditures over the same period and is expected to grow slowly over the next several years, officials say.
“These reforms slow the rise in health care spending while improving the quality of care for beneficiaries,” Tavenner says.
In 2013, Medicare covered 52.3 million people: 43.5 million people aged 65 and older, and 8.8 million people with disabilities. About 28 percent of these beneficiaries have chosen to enroll in Part C private health plans that contract with Medicare to deliver Part A and Part B health services. Total expenditures in 2013 were $582.9 billion. Total income was $575.8 billion.
“The Medicare report reminds us once again that the Affordable Care Act is controlling healthcare costs,” says Richard Fiesta, executive director of the Alliance for Retired Americans. “It’s great news that the life of the Medicare Trust Fund has been extended by another four years to 2030. Attempts to repeal healthcare reform would only undo the progress we have made in controlling healthcare costs.”
As for Social Security, the report says that if Congress doesn’t act by 2033, the federal government will only be able to pay 77 percent of scheduled benefits. Congress will need to address Social Security’s disability insurance fund by 2016 when it will become depleted and 81 percent of benefits are payable after that point. Social Security reserves are still growing and will continue to do so through 2019, the report says.
“The most important lesson from the report is that Social Security has a large and growing surplus,” says Fiesta whose group has supported legislation to increase Social Security benefits on average of $800 a year to support people in their retirement. “We do not need to cut Social Security to address the projected shortfall in the disability trust fund. Rather, we just need a technical adjustment. Congress should, as it has done multiple times before, simply reallocate income across these funds.”
The Social Security Administration estimates 163 million people paid payroll taxes for Social Security in 2013. By the end of 2013, there were 58 million beneficiaries and $812 billion in benefits were paid. It says it cost $6.2 billion to administration the program and has announced plans to shutter offices around the country to save money.
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