The Federal Reserve pulled the trigger. At the December Federal Open Market Committee meeting, the Fed finally acted, tightening monetary policy by raising the funds rate from 0.25 percent to 0.50 percent. It’s important to remember the Fed doesn’t actually set interest rates. It takes actions designed to influence financial behaviors. The Fed has given rates a push, it remains to be seen whether its efforts will bear fruit.
The European Central Bank (ECB) acted, too. Although, its monetary policy moved in a different direction, offering additional stimulus measures to support European economies. Investors were enthusiastic when the ECB announced its intentions; however, markets were underwhelmed when the economic measures delivered were less stimulative than many had expected.
China’s currency gained status. The International Monetary Fund decided to add the Chinese yuan (a.k.a. the renminbi) to its Special Drawing Rights basket, effective October 1, 2016. After the renminbi is added, the U.S. dollar will comprise 42 percent of the basket, the euro will be 31 percent, the renminbi will be 11 percent, the Japanese yen will be 8 percent, and the British pound will also be 8 percent.
Congress tweaked Social Security. The Bipartisan Budget Act of 2015 (BBA) averted a U.S. default and deferred further discussion of U.S. debt and spending levels until after 2016’s presidential and congressional elections. It also did away with two popular social security claiming strategies. The restricted application strategy was discontinued at the end of 2015, and file and suspend strategies will be unavailable after May 1, 2016.
Medicare premiums go up, but not for everyone. The BBA also limited increases in Medicare premiums. About 14 percent of Medicare beneficiaries will pay higher premiums in 2016. The new premium will be $121.80, up from $104.90 in 2015. Original proposals suggested the premium amount increase to $159.30.
The Centers for Medicare & Medicaid Services has quietly made it official: Medicare Part B premiums for 30% of Medicare recipients will jump next year, but not as high as they would have without the bipartisan budget deal passed late last month. While 70% of Medicare beneficiaries will have their premiums held to the same $104.90 per person a month they paid in 2015, the unlucky 30% will face a 16% increase in their base premium from $104.90 to $121.80 per person per month. And the 5% of beneficiaries who pay a high income surcharge, will pay a 16% increase in that surcharge, along with paying the higher base.
Without the budget deal, both the base and the surcharges for Part B, which covers doctors’ and outpatient services, would have risen by 52%. “By historical standards it (16%) is a very, very large increase,” says Joe Antos, health policy expert at American Enterprise Institute. “It’s not as much as it would have been, but it’s big.”
As for the high income premium payers, they’re “in a permanent state of shock,” Antos observes. Graduated high-income premium surcharges for seniors kick in for singles with a modified adjusted gross income of more than $85,000 and for couples with a MAGI of more than $170,000. (The premiums for 2016 are based on the AGI reported on 2014 tax returns.)
An individual earning more than $85,000, but less than or equal to $107,000, will pay $170.50 a month in 2016, up from $146.90 a month this year. A wealthy senior couple with AGI of $428,000 or more will pay $9,355 a year in Part B Medicare premiums, up from $8,056 in 2015.
The Part B premium debacle is set against the backdrop of falling oil prices, which means that overall inflation has been almost nil, and Social Security recipients will get no cost of living increase for 2016, their first year since 2011 without a boost. A 1987 “hold harmless” provision, designed to keep recipients’ Social Security net checks from shrinking, provides that for ordinary retirees who have Part B premiums deducted from their Social Security checks, the standard premium can’t go up in any year by more than the extra dollars they’re getting as a cost of living adjustment in their Social Security checks. That protects 70% of recipients.
But medical costs, and in particular Medicare’s costs, are increasing. And a different law requires that premiums paid by beneficiaries cover 25% of Part B total costs. The odd result: the increases the 70% of recipients don’t pay are shifted onto the 30% who aren’t protected by the hold harmless provision. That unlucky 30% includes those who are better off, those who don’t have Medicare premiums withheld from their Social Security, and those who didn’t receive Social Security in 2015.
Here’s the table of what you’ll pay per month for 2016, depending on your income, for individuals and for couples filing a joint tax return:
Beneficiaries who file an individual tax return with income:
Beneficiaries who file a joint tax return with income:
Income-related monthly adjustment amount
Total monthly premium amount
Less than or equal to $85,000
Less than or equal to $170,000
Greater than $85,000 and less than or equal to $107,000
Greater than $170,000 and less than or equal to $214,000
Greater than $107,000 and less than or equal to $160,000
Greater than $214,000 and less than or equal to $320,000
Greater than $160,000 and less than or equal to $214,000
Greater than $320,000 and less than or equal to $428,000
Greater than $214,000
Greater than $428,000
Note these officially-released numbers are slightly higher than those talked about after the budget deal: $120.70 for the base monthly premiums for those not held harmless. “This is actuarial nitpicking at its finest,” Antos says.The last time we saw hikes like these was in 2011, when premiums for high income folks rose 15%, and Antos warns that we could see them again for 2017. Starting in 2020, the high income premium brackets will be adjusted for inflation, so that promises to keep some out of reach of the income surcharges. But don’t count on it. “We’re going to have several years of Congress looking for money from Medicare,” says Antos. “It’s easy to remove that indexing. It’s always easier to pick on high income people than anybody else.”
Is there a way around these high premiums? Use strategies now that will let you control your adjusted gross income in retirement. The income-related premiums are based on your income two years prior. Planning ahead with Roth conversions can help manage your bracket in retirement. Fidelity’s latest retiree healthcare cost is $245,000 a couple and that’s not including income-related Part B surcharges.
If you have a high deductible health insurance plan now, fund a health savings account and invest it until you need it for medical expenses in retirement (you can use money in a health savings account for Medicare premiums but not for Medigap policies). It’s possible to build a $150,000-plus health savings account. If you’re already getting hit with Medicare income-related premiums, bunching income into one year can help keep premiums down another year.
Millions of Americans just got to keep their health insurance, as the Supreme Court ruled earlier today in a 6-3 decision for the government in the King v. Burwell Obamacare case.
The case considered the highly anticipated challenge to whether the IRS can issue insurance subsidies for individuals enrolled on the Affordable Care Act federal exchange. In doing so, the Court upheld President Obama’s signature achievement for the second time, allowing the law to escape what many viewed as a potential disaster.
In the words of Tim Westmoreland, a law professor at Georgetown, the latest challenge to the Affordable Care Act has ended in one big case of “never mind.”
The lawsuit focused on specific language from the Affordable Care Act’s Definitions section, which says that subsidies shall be made available to individuals who enroll in exchanges “established by the state.” Under the plaintiff’s plain-meaning argument, this word choice should preclude subsidies for anyone except those enrolled on state-based insurance exchanges, specifically the federal exchange Healthcare.gov.
The Court rejected this interpretation, along with the plaintiff’s argument that this language was built into the law intentionally to coerce states into setting up their own exchanges at the risk of losing access to federal subsidies.
The coercion argument, Westmoreland said, was particularly weak.
“Other than some highly rhetorical comments by Johnathan Gruber, I know of nothing that would suggest that Congress intended to do that,” he said. “The idea that they would put a gun to the states heads on page 113 in the Definitions section is just nuts… It’s in the definition of the term ‘coverage month.’ Who would ever look there to find the doomsday machine?”
According to research by the Kaiser Foundation, at stake in this decision were subsidies for more than 6.3 million people across the 34 states that haven’t set up their own exchanges. Many health care experts, wuch as the Urban Institute’s Matt Buettgens, predicted nightmare scenarios for the insurance marketplace at large in the wake of an adverse ruling. He suggested that the fallout from such a decision would have left more than 8 million people uninsured.
“We could see drastically decreased enrollment, and those remaining enrolled could see a much higher cost than average,” he said, speaking before today’s ruling on a possible adverse decision. “We could see large increases in costs of premiums, and because we would see many more people uninsured we would also then see much more uncompensated care that federal and state governments would end up paying for.”
“There are examples of premium death spirals that have actually occurred,” Buettgens added. “This would be an accelerated version of that because most of the enrollees would be hit immediately with increases once their tax subsidies go away, so that would jump start the process.”
Today’s ruling for the government will leave the system more or less in place, allowing subsidies to continue uninterrupted for enrollees on the federal exchange.
For the time being, it looks as though this may end the significant legal challenges to Obamacare, said Westmoreland of Georgetown. The only outstanding issue is a case challenging the constitutionality of the Independent Payment Advisory Board, which is unlikely to proceed due to the fact that the Board has not yet made any decisions.
Westmoreland cautioned about over-confidence on the part of the Obama Administration, however, pointing out that few in the legal community foresaw the potential significance of King either.