Social Security and Medicare Integration
Posted Mar 5, 2020
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 that has been in existence since 1935 and has been helpful to provide financial security to retirees for the last 85 years. While there are a lot of 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 are only going to be talking about the 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 and because 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 for 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 is going to be permanently reduced by up to 30% for the rest of their life. To figure out what your PIA is 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 8% for every year the person opts to delay taking their Social Security benefit. Planning for the different Social Security filing strategies is something that should be planned carefully to maximize the lifetime benefit for the entire household.
Now how does this integrate into Medicare and what kind of things do people need to plan for regarding Social Security filing strategies?
Since an individual isn’t eligible for Medicare until age 65, a person could be receiving Social Security benefits already. 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 has the option for the Part D prescription plan premium to be withheld from their Social Security check each month or they can pay it themselves. Medicare Part A is typically free for most people, but for the person that does have to purchase it, they will pay that monthly.
For an individual that is not receiving Social Security when they become Medicare eligible, they will need to enroll into Medicare Parts A & B and will pay their Part B premium on a quarterly basis. If this person is still working and has health insurance through their employer, they might not have to enroll into Part B if their employer plan meets certain qualifications. This person should contact a health insurance expert to review their existing coverage so that they will avoid paying any penalties.
In addition to Parts A & B, there are also
supplemental plans that 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 is not withheld
from the Social Security payment.