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Social Security and Medicare Integration

Posted March 5, 2020

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How Social Security Works

I frequently receive questions when it comes to how Medicare and Social Security coordinate. Hopefully, I’ll answer a few of those questions with this article.

Social Security is an amazing program in existence since 1935 and has helped provide financial security to retirees for the last 85 years. While there are many myths out there about Social Security, and I’d be happy to discuss those in future posts, I’d like to keep this narrowed to how Social Security works and how it coordinates with Medicare.

The amount that an individual will receive is built around something called the Primary Insurance Amount (PIA). While there are several types of Social Security payments (spousal, survivors, and child), we will only be talking about retirement benefits. The PIA is calculated with a complex formula that uses the highest 35 years of inflation-adjusted earnings of an individual’s lifetime. This means that the $20k salary in 1985 would be adjusted to a $48k salary in 2020. People are typically in the highest-earning period of their careers right before retirement; every additional year worked means a lower-earning year drops out of the calculation. This translates to a potentially higher Social Security payment during retirement every year you decide to work longer.

When to file is a tricky subject and really should be a decision that is well thought through and part of an overall financial plan. While an individual can file for Social Security as early as age 62, the benefit will be permanently reduced by up to 30% for the rest of their life.[1] To figure out your PIA and what you are estimated to receive at Full Retirement Age (FRA) vs. age 62 and age 70, make sure to visit the Social Security Administration’s (SSA) website and create an account for yourself at https://www.ssa.gov/myaccount/.

Now, if an individual decides to delay taking Social Security at FRA and waits until age 70, the SSA rewards them handsomely. They will increase the monthly benefit by 8% every year the person opts to delay taking their Social Security benefit.[2] Planning for the different Social Security filing strategies should be planned carefully to maximize the lifetime benefit for the entire household.

Medicare Integration

How does this integrate into Medicare, and what kind of things do people need to plan for Social Security filing strategies?

Since an individual isn’t eligible for Medicare until age 65, a person could already receive Social Security benefits. For this person, they will be automatically enrolled in Medicare Parts A & B when they turn 65, and the premium for Part B is automatically withheld from their Social Security payment each month. The person can choose the Part D prescription plan premium to be withheld from their Social Security check each month or pay it themselves. Medicare Part A is typically free for most people, but a monthly premium will be due for someone that has to purchase it.[3]

Individuals not receiving Social Security when they become Medicare-eligible will need to enroll in Medicare Parts A & B. They will pay their Part B premium every quarter. If this person is still working and has health insurance through their employer, they might not have to enroll in Part B if their employer plan meets certain qualifications. This person should contact a health insurance expert to review their existing coverage to avoid paying any penalties.

In addition to Parts A & B, supplemental plans fill in the gaps that Medicare leaves. This is the type of policy that will be advertised heavily in mailings and on TV. I highly recommend anyone interested in purchasing a supplemental policy to talk with a trusted Medicare insurance agent to help decide which policy makes the most sense for them (there are a lot!). There’s no additional cost to purchasing it from an insurance agent, and the agent can help weed through the noise. Since this policy is purchased from private insurance agencies and not Medicare, the premiums will be paid directly to the insurance company and are not withheld from the Social Security payment.

[1] https://www.ssa.gov/planners/retire/applying2.html

[2] https://www.ssa.gov/planners/retire/delayret.html


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