Medicare Rules and HSA’s

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Medical symbol with sunriseThe rise of high-deductible employer health plans has created one of the most unpleasant surprises for older employees. 

Anyone on Medicare is no longer allowed to make tax-free contributions to a health savings account (HSA).

In 2003, Congress authorized HSAs as part of the law that also brought Part D drug plans into existence. HSAs are only available to those with a high-deductible health plan.

The beauty of an HSA is that it is funded with pre-tax dollars and its holdings can be invested, like a 401(k). When spent, any earnings on these investments are exempt from income taxes, like a Roth IRA, so long as the expenditures are for qualifying medical expenses. Unlike flexible spending accounts, HSA contributions do not have to be spent by the end of each year but can be carried over indefinitely.

There are minimum deductions needed for a health plan to qualify as high-deductible, and they may change each year. For 2018, plans must have an annual deductible of at least $1,350 if they cover individuals, and $2,700 for families. Further, such plans may not generate out-of-pocket expenses that exceed $6,650 for individual plans and $13,300 for family coverage. These expenses, the IRS says, include plan “deductibles, co-payments, and other amounts, but not premiums.”

The annual maximum on these contributions in 2018 will be $3,450 for HSAs linked to individual insurance plans, and $6,900 for family plans. In addition, $1,000 age-related “catch up” contributions are permitted for those aged 55 or older. This raises the total limits of plan contributions to as much as $8,900. Employers often contribute the rest of these funds. And, contributions to a plan can come from family and friends as well as the insured individuals.

While most HSAs are linked with employer insurance plans, any qualifying high-deductible plan can permit the insured person or family to open an HSA. This includes private health plans through financial institutions. 

Medicare and Social Security enter the HSA picture because Medicare insurance is not a high-deductible health plan. Anyone with Medicare, or coverage from other health plans that do not offer qualifying high deductibles, may not contribute to an HSA. A person can continue to use any assets within an existing HSA account.

Most common questions:

Why does receiving Social Security prohibit a person from contributing to an HSA?

The law requires anyone aged 65 or older who is receiving any type of Social Security benefit to also be enrolled in premium-free Medicare Part A, which covers hospital expenses. This triggers the Medicare-related ban on HSA contributions. Historically, enrolling in Medicare Part A was a very good thing. It can be used as secondary insurance for people covered by employer health plans with no premiums. The rise of high-deductible health plans can make Medicare Part A a dubious benefit. Unfortunately, the only way to reject Medicare Part A is to withdraw from receiving Social Security benefits.

Why does Medicare Part A take effect six months before an individual’s requested effective date? And, how does a person know when to stop HSA contributions?

The earliest that a non-disabled person can enroll in Medicare is age 65. If enrolling in Medicare within six months prior to turning 65, Medicare Part A will start on the first of the month when turning 65. If enrolling in Medicare after turning 65, a person is entitled to as many as six months of retroactive benefits, but in no case can the effective date be earlier than when turning 65.

Historically, people were better off with these retroactive benefit dates. Clearly, that may not be the case when it conflicts with an HSA. 

People who claim Social Security benefits before they turn 65 are too young to qualify for Medicare Part A. Claiming Social Security does not always interfere with an HSA – only if a person is 65 or older.

If a person knows they are going to become ineligible for HSA contributions during a calendar year, can they “front load” that year’s allowable contributions before becoming ineligible?

No. It’s important to remember that contributions to an HSA are calculated monthly. For example, if someone with family coverage had $6,900 in allowable HSA contributions, the rules “credit” one-twelfth of that amount each month, or $575.

Normally, it would not matter if the person made all those contributions in January, for example, because the rules assume they would qualify for HSA contributions for the entire year. But if they became ineligible in July, they would only be able to contribute $3,450 (six $575 monthly contributions).

What happens to any excess contributions?

They need to be removed from the HSA and treated as taxable income on the annual tax return. These rules are explained, albeit not always clearly, in IRS Publication 969

What happens to the employer’s contributions?

The employer has made a commitment to contribute, for example, $1,500 for the year to the employee’s HSA. It is legal for the employer to contribute a full annual contribution. In this example, for a period of six months, the employee’s allowed contributions would be $1,950 in addition to the employer’s $1,500 contribution.

It is the responsibility of the employee to make sure there are no excess contributions. If there are, it’s the responsibility of the employee to correct it before filing that year’s tax return. If the employer does not have knowledge of the employee becoming ineligible for additional HSA contributions, there is no reason why the employer’s contribution should terminate.

What if a person has family coverage and one family member becomes ineligible?

If one spouse becomes ineligible, the full amount of that year’s family HSA contributions normally can be made by the eligible spouse. The $6,900 can be contributed in any way the couple prefers. If the ineligible spouse was making a $1,000 catch-up contribution, this would no longer be allowed.

One important requirement is that if the employee is the person who begins Medicare and becomes ineligible, the spouse must have established their own HSA in order to complete the couple’s allowable contributions.

Is there was a family HSA for people with family health coverage?

There are no joint HSAs. Each spouse must have their own HSA if they wish to make tax-free contributions. This most often happens where the non-employee spouse wishes to make an age-related catch-up contribution of $1,000. That contribution can only be placed in their HSA account. Employers usually do not create such accounts, so the non-employer spouse needs to work with a financial firm to establish the account. There are ongoing efforts to revise HSA laws and eliminate the need for non-employee spouses to create separate HSAs for their catch-up contributions.

If an employer offers only the high-deductible plan, what can a person do if they are ineligible for an HSA?

If a person wants employer health insurance, they will need to accept the likelihood that out-of-pocket expenses could be substantial without HSA funds.

People with Medicare Part A should take a close look at whether it makes sense for them to reject their employer’s health plan and, instead, purchase Medicare Part B and other Medicare coverage, including a Medicare Part D drug plan with an optional Medigap supplement plan or a Medicare Advantage plan. 

If ineligible, how does this affect income taxes?

If a person has made excess contributions and can withdraw them by the time income taxes are due, there will not be a penalty due to the IRS. Otherwise, the penalty is 6 percent.

What tax forms should be used?

Form 8889 is used for reporting your annual HSA activity. Form 5329 is used to report excess contributions. If using a tax preparer, work with them on how to file these forms.



Social Security Data Errors and the Living Dead

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social-security-coupleA few months ago, when Dr. Thomas Lee logged in to his patients’ electronic medical records to renew a prescription, something unexpected happened. It was a notice that one of his patients had died.

Lee, a primary doctor at Brigham and Women’s Hospital in Boston, was scheduled to see the patient in three days.

“I was horrified,” he says. The patient had been in his 80’s, and his wife had died a few months before. “And everyone in medicine knows that when someone dies, there’s an increase in risk of death for their spouse over the next six months.”

He wanted to know what had happened, but he couldn’t find anything in the medical records or in a Web search. “I just felt really guilty that I had not pushed harder to get him in sooner,” says Lee. When he couldn’t find out anything, he decided to phone the man’s house to offer condolences — maybe even to apologize.

“So I called, and to my shock he answered,” says Lee. It was the patient, a retired professor living in Boston.

“I assume you’re calling about my death,” the man said.

“It gave me goose bumps,” says Lee. “I said, yes, I guess I am.  And then he explained to me what had happened.”

The professor explained that he had been dealing with his own death for the past two weeks. It all started when he went to the ATM, only to find that he no longer had access to his bank account. When he went to the pharmacy to pick up his medicine, he found he no longer had health insurance.

Soon after, he got a letter in the mail from the Social Security Administration offering condolences about his recent loss of life and informing him that his monthly payments would end and that payments made since his “death” a few months prior would be removed from his bank account.

Because of a clerical error, the Social Security Administration believed he had died in December 2015. That information had quickly spread to banks, pharmacies, and hospitals. His doctor appointments had been wiped out and other patients had taken his place. Essentially, he had been locked out of his life.

“It was a major nuisance, let’s put it that way,” he says. And to add insult to death, says the professor, “Social Security actually gave my date of death as the same date as my wife’s, which was really creepy. Not pleasant to see.”

He spent weeks on the phone trying to correct it all. In the process, the man learned that because he had supposedly died, all his information — his full name, Social Security number, birthday and supposed death date — had been released to the public in a document called the Death Master File.

The publication of the file is a measure taken to prevent fraud, such as someone taking out a credit card in a deceased person’s name. But for those who are still living, the file is a recipe for identity theft and why this article is not naming the man. 

“I’m keeping an eye out fairly carefully to see if anything goes awry,” he says. “But it’s also somewhat amusing to know that you really are alive when everybody thinks you’re dead.” He even got a hug from a surprised doctor who didn’t expect him to show up for his canceled appointment, let alone in relatively good health.

It took about two months to resurrect him in the federal system.

And as Lee wrote [August 2016] in the New England Journal of Medicine, what happened to the professor happens to thousands of people each year.

“When we called the information system people to bring him back to life, the response that we got was, ‘Oh no! Not another one,’  said Lee. There’s even a frequently asked question about it on the Social Security Administration’s website.

“And this is where I made the transition from thinking about this as something amusing to something very important,” said Lee. “We have a society where information travels quickly and there are many great things about it, but what if that information is wrong? There just is no process in most information systems for saying ‘Oops, we were wrong.’ “

In 2011, an audit found that about 1,000 people a month in the U.S. were marked deceased when they were very much alive. Rona Lawson, who works in the Office of the Inspector General at the Social Security Administration, says that number has gone down. It’s now around 500 people a month.

“But for those 500 people, it’s still a big impact on their lives, so we’d like to see the number even lower,” she says. Because most of the people are Social Security clients, she says, they tend to be retired and over the age of 60.

Lawson says 90 percent of the time, the cascade of misinformation starts with an input error by Social Security staff — a regular mistake on a regular office day that just happens to record a person as deceased, at least on paper.

And she says the professor’s case, where someone is given the death date of their spouse, is fairly common.

In 2011, Congress passed legislation to remove a few pieces of information from the Death Master File – the state, county and ZIP code where a person lives or lived. And in 2013, based on recommendations by Lawson and her colleagues, Congress passed another piece of legislation to keep a person’s information from becoming public until 3 years after their death date. The change will be effective in late November 2016.

“So, that’s an improvement — more time to get it right before it gets into the public domain and starts spreading to all the different websites and so forth,” says Lawson.

She says the information would still go to authorized users like banks and credit reporting agencies, so while the change might keep back identity thieves, it wouldn’t do much to prevent the headache that the retired professor went through.

“At least we can keep the information restricted to those who have a right to know it and not just everybody that has an Internet access,” says Lawson.

But wait a minute. Putting aside the headache of having to convince everyone you’re still alive just so you can withdraw cash from an ATM, or pick up your prescriptions, might a fake death be seen as an opportunity? Maybe to disappear to a tropical island and start a new life?

“I never thought of that,” says the professor. “But that might have been an interesting way to proceed.”

Social Security – As Soon As Possible?

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Couple hikingWhen is the best time to start taking Social Security benefits? The answer is not always so simple. Perhaps this article with provide some things to think about as you ponder your choices. 

Myth No. 1:  If you wait, you get more…

The older you are when you start, the more Social Security monthly income you receive. The Social Security Administration thus entices people to wait longer. But let’s look at this a little deeper.

Let’s use an example. Assume at age 62 a person’s Social Security monthly income will be $1,000 per month. However, if they wait until age 67, this monthly income increases to $1,500. More is better, right?

Remember that in order to get this extra $500 per month, this individual had to wait five years. So if we calculate the income this person did not receive, it comes out to $60,000 ($1,000 per month for five years).

The proper thing to do in this example is analyze the pros and cons of waiting five years for the extra $500 per month.

Using the example, the pros are simple. Waiting earns you an extra $500 per month, which is a good thing.

Now let’s take a look at the cons. How many months does it take someone to simply break even (from a financial perspective)? Well, if you divide $60,000 (lost income) by the $500 (additional income), it comes out to 10 years.

However, the story does not end here. Remember, by waiting five years this person is now 67 years old. Therefore, in order to accurately calculate the lost income and “break-even” point, you also have to add in the five years this person waited (from age 62–67). Therefore, it really takes this person 15 years to simply break even and justify deferring their Social Security income.

But wait, there’s more …

Some other key factors to consider are:

  • Five years of potential lost interest or growth from the monthly income
  • Five years of lost ability to spend and enjoy the extra monthly income
  • Countless years of lost income due to a possible critical illness
  • Countless years of lost income due to a possible premature death
  • Countless years of lost income due to an unexpected illness or death of a spouse
  • Countless years of reduced purchasing power as a result of inflation
  • Countless years of lost income due to the potential for taxes to go higher
  • Countless years of lost income due to potential reductions, changes, or even the elimination of Social Security income

Myth No. 2:  My income and taxes will be lower in retirement…

Far too often individuals/couples make major mistakes as a result of basing a financial decision upon its tax consequences.

Most of us have heard the argument, “I will be in a lower tax bracket when I retire.” This statement seems to be an amazement for several reasons.

First, why do so many aspire to have a significant income reduction once they reach retirement? Retirement is commonly referred to as the Golden Years, right? This implies that you worked hard and long enough to have saved enough gold to live like Kings and Queens.

Second, when are you more likely to spend more money: While you are working or when you are on vacation? Since the obvious answer is while on vacation, isn’t it fair to say that retirement is supposed to be a wonderful, long, enjoyable vacation from work? Retirement is arguably the time when you have earned the right to spend and enjoy your hard-earned wealth and income.

Yes, more income does mean more taxes, indisputably. However, here is a theory on taxes: Make a lot of money, pay a lot of taxes, and repeat the process.

Again, let’s again analyze the pros and cons.

The main pro for deferring Social Security income is simple. More income means more taxes, and nobody likes paying more taxes.

Now, let’s take a look at the cons using an example:

In 2012, Couple No. 1 earns $50,000 per year. Couple No. 2 earns $500,000 per year.

Couple No. 1 paid less in Federal taxes (15 percent) than the couple earning $500,000 per year (35 percent). In fact, on the surface (excluding any deductions and State income taxes) Couple No. 1 paid a mere $7,500 in taxes, while Couple No. 2 paid a whopping $175,000 in taxes.

However, which of the following retired couples would you rather be:

Couple No. 1: Net Income (after taxes) is $42,500 per year, or $3,542 per month. Couple No. 2: Net Income (after taxes) is $325,000 per year, or $27,083 per month.

But wait, there’s more …

Some other key factors to consider are:

  • Today we are in the sixth lowest tax bracket in history
  • A large majority of people today believe tax rates are going higher
  • There are many reasons a person’s (or couple’s) taxable income can actually increase in retirement (employment income, asset and income growth, inheritances, spouse’s death and rental income, IRA Required Minimum Distributions, loss of deductions, and more).

A bird in the hand

When it comes to determining the right time to take Social Security income, too many individuals and couples conclude it’s in their best interest to delay beginning to take Social Security income so as to increase their future income and/or minimize their income tax.

Social Security at 80: Eight Savings Strategies

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Social Security 80

Social Security celebrated its 80th birthday on August 14, 2015. And while news about the program’s financial status is rarely upbeat, most Americans are glad it still exists especially women and lower-earning workers.

Here’s why you need to pretend it doesn’t exist: Underfunded as it is, Social Security remains a favorite political football. At the same time, we’re living longer, and our savings need to last. So whatever happens to Social Security, it’s more important than ever to use all the savings strategies at your disposal.

Here are 8 ways to do that, one for each decade of Social Security.

1. Make savings simple

Just how important will your personal savings be in retirement? According to the National Academy of Social Insurance, a non-profit group that focuses on “how social insurance contributes to economic security,”  the Social Security program replaces more than 50 percent of income for low-earning workers. Furthermore, high earners would need to radically reduce their lifestyle if they need to rely heavily on Social Security income in retirement.

The Social Security Administration calculates income replacement rates for retired workers across a range of income scenarios, from those with very low income to those who hit the maximum annual amount of income taxed by Social Security (in 2015, it’s $118,500).  Their calculations assume 35 years of contributing to the program and are based on Social Security’s national average wage index (AWI). For 2015, the average is $47,820.

If you’re lucky enough to be at a company that offers a 401(k), you may already be funneling money into it every pay period. Maybe you can even save enough to get all of the company match, if there is one. Saving 12 to 15 percent of your salary in a 401(k), up to the 2015 contribution limit of $18,000, is a very good idea.

That assumes you already have a cash emergency fund of three months at the very least. If your budget allows, try setting up automatic deductions from your checking account into other savings accounts, even if it’s just $25 or $50 a paycheck. And if you don’t notice that it’s gone, kick the contribution up a little higher.

2. Keep 401(k) savings sacrosanct 

One challenge millennials face that their parents didn’t is handling 401(k) accounts while moving jobs every two to three years. Rather than roll an old 401(k) into a new employer’s plan, many young savers just cash it out, which means paying income tax on it and a 10 percent penalty.

In the fiscal year of 2014 that ended on March 31, more than 40 percent of 401(k) participants between the ages of 20 and 29 cashed out all or part of their plan balance after leaving a job, according to Fidelity. Even for those between the ages of 40 and 49, the cash-out percentage was high, at 32 percent.

Barring a lottery win or a fat inheritance, starting to save early, so money can compound over many decades, is really the only way most younger savers are going to arrive at retirement age with a decent nest egg.

3. Wage war on fees 

This means, first, knowing what fees you are paying for different investment accounts. Many people have no idea, particularly when it comes to retirement savings accounts such as 401(k) plans. A Department of Labor rule saying plans must provide participants with fee disclosure has made that information more easily available.

Once you find that information, your plan probably won’t note whether those fees are low, average, or high compared to similar funds. You can get a rough sense of it at

4. Check your asset mix

If you have multiple investment accounts outside your 401(k), or just multiple 401(k)s, it can be hard to know what percentage of your assets are in cash equivalents, bonds, and stocks. What is the optimal mix?

Everyone’s situation and risk tolerance are different, but the asset allocation in target-date funds gives a sense of what some large investment companies think is ideal.

5. Know your risk tolerance 

To guard against getting too stressed by market swings, investors may want to separate their money in different buckets. Money can be tied to short-, medium- and long-term goals, with each bucket having a different risk profile.

6. Be an employee benefits ninja

If you’re offered a flexible spending program or the ability to pay your commuting costs with pre-tax money, take the time to learn about them. You’ll get more mileage out of your money and lower your income taxes to boot. Making the most of tax-advantaged perks is a small way to give yourself a raise in a time of stagnating wages.

Employers have been shifting more costs to employees, often through the use of high-deductible health-care plans. Companies’ adoption of such plans may slow next year, according to a survey of more than 100 large U.S. employers. Employers are waiting to see if lawmakers repeal Obamacare’s “Cadillac tax” on high-cost health coverage, which is a levy on individual health premiums greater than $10,200.

Health care savings accounts (HSAs), which go hand-in-hand with high-deductible health plans, will likely become a greater part of employee’s lives. These are “triple tax-free”—what you put in is sheltered from income tax, it grows tax-deferred, and the money can be used, tax-free, for medical expenses. Companies usually seed the accounts with a few hundred dollars, pre-tax, and your contributions are tax-deductible. You can contribute up to $3,350 for an individual policy and $6,650 for a family plan. And unlike flexible-spending programs, they are not “use it or lose it,” so your money accumulates.

7. Ignore the fancy stuff 

There are many benefits to keeping your finances fairly simple, like having a clear picture of where you stand. Unless you’re a seasoned speculator whose retirement is already more than provided for, avoid any investment with the word “leverage” or 2x or 3x (or more) in its name.  It’s been said before, but bears repeating: If you don’t understand it, don’t buy it.

8. Eat your spinach 

Health care costs in retirement are the most likely expense to send your finances into the depths of abyss. Fidelity estimates that in 2014 a couple who retired at age 65 could look forward to $220,000 (in today’s dollars) in health care costs. That number didn’t rise from 2013, but it’s still way more than most people have saved for all of their retirement.

The AARP has a pretty simple calculator, and there are many others, that will scare you into the gym if you aren’t there already. It’s like making money!

Good News, Bad News: Medicare Trustees Report

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Sylvia Burwell & CompanyAs Medicare approached its 50th anniversary, the federal program received some welcome financial news on Wednesday, July 22, 2015: its giant hospital trust fund will be solvent until 2030, and its long-term outlook has improved, according to a report from the program’s trustees.

But the report warned that several million Medicare beneficiaries could see their Medicare Part B monthly premiums skyrocket by 52 percent in January — from $104.90 to $159.30. Medicare Part B, which is paid for by a combination of federal funds and beneficiary premiums, generally covers physician and outpatient costs.

The huge rate hike is predicted because of a confluence of two factors: Medicare Part B costs increased more than expected last year, and Social Security is not expected to have a cost of living increase next year. By law, the cost of higher Medicare Part B premiums can’t be passed on to most Medicare beneficiaries when they don’t get a Social Security raise. As a result, the higher Medicare costs have to be covered by just 30 percent of Medicare beneficiaries. This includes the 2.8 million Medicare enrollees new to the program next year, 3.1 million Medicare beneficiaries with incomes higher than $85,000 a year and 1.6 million Medicare beneficiaries who pay their premium directly instead of having it deducted from Social Security. An additional 9 million people affected by the higher rates are so called “dual eligibles” — those on Medicare and Medicaid. States pay the Medicare Part B premium for duals.

Medicare Part B premiums are set largely by a complicated formula written into law. The trustees’ predictions on premiums are typically close to the final rates that are announced each fall by the Department of Health and Human Services.

HHS Secretary Sylvia M. Burwell said she will examine her options and make a final decision on rates in October. “Seventy percent of enrollees in Part B will have no change in premiums,” she said at a briefing with other program trustees.

A senior government official, speaking only on background information at a Treasury Department briefing on the report, said the projected premium increase in Part B is “atypical” and noted that outpatient health services were among those services that saw higher than expected costs last year. Another senior government official said Burwell has several “policy options” to lessen the premium increases but would not say what they are.

If the Social Security program determines in the next two months that a cost of living increase is needed for next year, that could diminish the premium hikes because they could be spread over millions more beneficiaries. But currently that is not expected.

Medicare advocacy groups expressed concern about the projected rate increase. Judith Stein, executive director of the Center for Medicare Advocacy, said she is concerned the predicted Medicare Part B premium hike signals that, for many, the program is becoming too expensive.

“I am concerned that people will start to rail against Medicare rather than love it, as they have for 50 years,” Stein said.

John Rother, CEO of the National Coalition on Health Care, a group of major consumer, businesses, health care providers and insurers that seeks to lower costs and improve quality, said the potential premium hike is worrisome.

“An increase of that magnitude is unprecedented and deeply concerning,” said Rother, a former policy chief at AARP, the powerful lobby for older Americans. “This should serve as a wake up call to Congress to get serious about cost containment and affordability in Medicare.”

“We are pleased to see that 70 percent of people with Medicare are expected to have a stable Part B premium, and it is concerning to us that 30 percent could see an increase,” said Stacy Sanders, federal policy director at the Medicare Rights Center. “When the final premium amounts are released, we are committed to educating people about their Part B premium, and most importantly, about the potential availability of [programs] that can help with the cost of the Part B premium.”

The possible huge Medicare Part B premium increase overshadowed a generally positive report about the financial health of the Medicare Part A, which covers hospital costs.

The trustees report noted that the financial health of the program is being helped by factors such as an improved economy, while other factors such as more seniors in private Medicare Advantage are increasing costs. The government pays higher costs for those in Medicare Advantage, which is managed care.

While 2030 remained unchanged as the year that the program’s funds would be exhausted, the report said the program’s long-term outlook was improved. That improvement was largely due to assumptions that health costs will grow at a slower rate after 2050.

In 2014, Medicare provided health insurance coverage to 53.8 million people at a cost of $613 billion – roughly the GDP of Argentina. The average value of the Medicare benefit per enrollee was $12,432, about 2 percent higher than last year.

Medicare turned 50 on July 30 — eligible for its own AARP card — but it is increasingly feeling the strains of retiring baby boomers.

Medicare is adding 10,000 new beneficiaries a day as baby boomers reach age 65. The Obama administration is in the midst of overhauling the way Medicare pays doctors and hospitals to emphasize quality results over the sheer volume of procedures, tests and services. HHS has set a goal of tying 30 percent of payments under traditional Medicare to new models of care by the end of 2016 and an increasing share thereafter.

The trustees report also cautioned that the Social Security Disability Insurance program, which covers 11 million people with disabilities, is projected to become insolvent in the fourth quarter of 2016, unchanged from last year. President Barack Obama has proposed shifting funding from another Social Security trust fund to address the imbalance.

The projected trust fund insolvency doesn’t mean that Medicare is “running out of money.” Even in 2030, when the hospital trust fund is projected for exhaustion, incoming payroll taxes and other revenues will cover 86 percent of program costs.

The Medicare trustees are Sylvia Burwell, HHS Secretary, Jacob Lew, Treasury Secretary and Managing Trustee, Thomas Perez, Labor Secretary and Carolyn Colvin, Acting Social Security Commissioner.

Two other members are public representatives appointed by the president: Charles Blahous III and Robert Reischauer. And, Andy Slavitt, CMS Acting Administrator, is designated as secretary of the board.

What Americans Don’t Know About Social Security

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Just 28 percent of Americans received a passing grade (60 percent or higher) when asked basic Social Security questions, a new study from MassMutual finds. Moreover, from a pool of 1,500 respondents ages 18 to 65, just one person answered all 10 true/false questions correctly.

The quiz touched on a range of topics, including the national retirement age, spousal benefits and eligibility for benefits. The high failure rate suggests: Too many Americans are lacking the knowledge and tools that will allow their retirement reality to match their retirement dreams.

“Perhaps the greatest Social Security deficit in this country is the lack of education around the retirement benefits of the program,” said Michael R. Fanning, executive vice president, U.S. Insurance Group, MassMutual. “With millions of Americans nearing retirement each year, many may be at risk of underutilizing a critical component of their retirement income stream.”

If there’s a silver lining, it’s self-awareness: Just 8 percent of those surveyed considered themselves to be very knowledgeable on the subject of Social Security.

How does your own knowledge stack up? Continue reading for the full quiz.

  1. True or False? Social Security retirement benefits are based on my earnings history, so I’ll receive the same monthly benefit amount no matter when I start collecting.

A: False. If you collect Social Security retirement benefits before reaching full retirement age, you effectively lock in a lower monthly benefit amount. If you wait to begin collecting until after you reach full retirement age, you become eligible for delayed retirement credits. These credits increase your monthly benefit amount by 8 percent each year that you delay collecting, up to a maximum of 32 percent. Once you reach age 70, no additional delayed retirement credits accrue.

Source: Social Security Administration, Retirement Planner: Benefits by Year of Birth; http://www.

  1. True or False? If my spouse dies, I will continue to receive both my own benefit and my deceased spouse’s benefit.

A: False. Social Security retirement benefits are only paid while you are alive. Assuming that you qualify, you would receive the greater of your own benefit or your spouse’s benefit, but not both.

Source: Social Security Administration, Retirement Planner: Benefits for Your Spouse; yourspouse.htm

  1. True or False? I must be a U.S. citizen to collect Social Security retirement benefits.

A: False. You do not have to be a U.S. citizen to qualify for Social Security retirement benefits. Resident aliens who pay into the Social Security system may qualify to receive retirement benefits, assuming they earn enough credits and meet additional criteria. To become part of the Social Security system, non-U.S. citizens must have lawful alien status, permission by the U.S. Citizenship and Immigration Services (USCIS) to work in the U.S. and a Social Security Number.

Source: Social Security Administration, Social Security Handbook, Evidence of U.S. Citizenship, §1725; handbook.17/handbook-1725.html

  1. True or False? Under current Social Security law, full retirement age is 65.

A: False. Your full retirement age is based on the year you were born. For people born between 1943 and 1954, the full retirement age is 66. If you were born in 1960 or later, the full retirement age is 67. For anyone born between 1955 and 1959, the full retirement age increases gradually.

Source: Social Security Administration, Full Retirement Age: If You Were Born between 1943 and 1954;

  1. True or False? I can continue working while collecting my full Social Security retirement benefits — regardless of my age.

A: False. You can work and receive Social Security retirement benefits. However, if you have not reached full retirement age, your earnings will be subject to the retirement earnings test. If your income exceeds the test limit, Social Security may withhold all or a portion of your benefits. Withheld benefits are repaid over your lifetime once you reach full retirement age.

Source: Social Security Administration, Retirement Planner: Getting Benefits While Working; 2/whileworking.htm

  1. True or False? If I file for retirement benefits and have minor dependent children, they also may qualify for Social Security benefits.

A: True. When you file for Social Security retirement benefits, your children may also qualify to receive benefits based on your record. An eligible child can be your biological child, adopted child or stepchild. A dependent grandchild may also qualify. Normally, benefits stop when children reach age 18 unless they are disabled. However, if the child is still a full-time student at a secondary school at age 18, benefits will continue until the child graduates or until two months after the child becomes age 19, whichever is first.

Source: Social Security Administration, Retirement Planner: Benefits for Your Children; yourchildren.htm; payee/index.htm

  1. True or False? As a divorced person, I can collect Social Security retirement benefits based on my ex-spouse’s earnings history.

A: True. You may be eligible to receive retirement benefits based on your ex-spouse’s earnings record, provided that:

  • Your marriage lasted at least 10 years;
  • You are currently unmarried;
  • You are at least 62 years old; and
  • The benefit you would receive based on your personal earnings history is less than the benefit amount you would receive if you filed for benefits based on your ex-spouse’s earnings record.

If your ex-spouse has not yet applied for retirement benefits, but qualifies for them, you can collect benefits based on his or her record provided that you have been divorced for at least two years.

Source: Social Security Administration, Retirement Planner: Benefits for Your Divorced Spouse; http://

  1. True or False? Once I start collecting Social Security, my benefit payments will never change.

A: False. The Social Security Act of 1973 included a provision for cost-of-living adjustments (COLAs) to help Social Security benefits account for inflation. Each year, the Social Security Administration uses specific indexes and formulas mandated by this legislation to determine whether a COLA will apply to benefits paid in the coming year and if so, how much the increase will be. For more detailed information on how COLAs are calculated, visit the Social Security Administration website indicated below.

Source: Social Security Administration, Cost-ofLiving Adjustment; http://www.socialsecurity. gov/news/cola/

  1. True or False? Government workers may have their Social Security retirement benefits reduced.

A: True. For certain workers, Social Security imposes two “offsets” that reduce the full Social Security monthly benefits that might otherwise have been paid. The Windfall Elimination Provision (WEP) affects workers who have earned a pension from an employer (such as a government agency) that did not collect Social Security taxes and who also have worked in other jobs long enough to earn Social Security benefits. Under the WEP provision, Social Security uses a modified formula to calculate your benefit, resulting in a lower benefit than you might otherwise have received. The second offset, called the Government Pension Offset (GPO), affects a spouse’s benefit based on your earnings. The GPO can reduce spousal benefits to $0.

Source: Social Security Administration, Information for Government Employees;

  1. True or False? My spouse can qualify for Social Security retirement benefits, even if he or she has no individual earnings history.

A: True. Many spouses choose to stay at home to raise children or otherwise spend extended periods of time outside the paid workforce. This can affect a spouse’s ability to qualify for Social Security benefits. In such cases, the spouse who earns less may be eligible for a Social Security spousal benefit. A spousal benefit can be as much as 50 percent of the higher earning spouse’s full retirement age benefit. The exact percentage will depend on whether or not each spouse has reached his or her full retirement age.

Source: Social Security Administration, Retirement Planner: Benefits for Your Spouse; retire2/yourspouse.htm#a0=0

The Wrong Way to Save for Retirement

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It is a truth universally acknowledged that Americans are under-prepared for retirement. And given this sad fact, there’s a growing movement on the left saying we need a government solution, stat: specifically, an expansion of Social Security benefits.

Perhaps we are confused. Weren’t we just talking about entitlement reform so that we could spend less on the program? Why, yes, we were. But since no one, left or right, really wants to take on our vast army of retirees, that chatter has died down. Now that it has, progressives who are ideologically opposed to shrinking the welfare state and are, of course, worried about retirees have decided that the best defense is a good offense. Instead of reluctantly agreeing to a compromise where some of those in Congress let some taxes rise and others agree to entitlement cuts, they’re demanding bigger tax hikes to fund bigger entitlements.

At the core of their argument is a good point: Americans really do need more money for retirement. Missing, however, is a realistic discussion of where to acquire that money.

And it’s a lot of money. The OASI Trust Fund (the portion of Social Security that covers old-age benefits) already pays out more in benefits than it collects in tax income. In 2014, the Social Security Trustees expect the system to collect $643.9 billion in payroll taxes and spend $716.4 billion on benefits and administrative overhead. If you add in the taxes collected on Social Security benefits, you get $671.9 billion in total tax revenue, which leaves a $44.5 billion deficit between outflow and inflow. Under its middle-of-the-road “intermediate” assumptions, the trustees’ report predicts that by 2023, the gap between taxes collected and benefits paid will be almost $170 billion. The only reason that the system isn’t in the red already is the net interest the government is paying itself on the bonds in the trust fund.

Now, we don’t want to get mired in the tired old arguments about whether the trust fund is “real” — whether it’s a silly accounting abstraction or a profound moral promise on the part of the U.S. government — because this obscures the actual point we need to be concerned with: If we want to pay Social Security beneficiaries more money than we are collecting in payroll taxes, the money has to come from somewhere, and ultimately, that “somewhere” is the United States taxpayer. It is supremely irrelevant whether that money flows through the “trust fund” or Uncle Sam holds an annual ceremony in which the trustees are handed one of those giant checks they present to lottery winners; we still need to find the money to make good on that check.

Before we start adding new benefits, we should think about where we’re going to get the money to pay the ones we still haven’t funded. And then carefully count the cost of making them still more generousl.

So where is the money going to come from, for our once and future Social Security program? The unhelpfully vague answer is generally “the rich.” Some specific numbers would be useful here, and thankfully, some people from the Third Way have actually provided some.

Let’s say the top income tax rate was raised a whopping 10 points, to 49.6 percent — a level higher than anything under serious consideration. Tack on the “Buffett rule,” with its 30 percent minimum tax on millionaires to squash loopholes. And let’s take a whack at wealthy inheritances, cutting the estate tax exemption by about one-third and setting the rate on large estates at 45 percent.

If we leave entitlements be, our annual budget deficit in 2030 would still be $1.3 trillion in today’s dollars, not much different from the $1.6 trillion deficit we’d have if income tax rates for the wealthy were kept the same. Sure, raising some additional taxes on the wealthy is necessary, but it is not nearly sufficient.

Another favorite is eliminating the cap on Social Security taxes, which is a slightly less vague way of saying “the rich”. Every time Social Security is discussed, at least one upset person will demand to know how anyone can so disingenuously claim the system is in need of reform, when “all we need to do is get rid of the cap on the payroll tax.” All? “All we need to do” implies some sort of modest, unremarkable undertaking. In fact, as the Committee for a Responsible Federal Budget points out, this amounts to a 12.4 percent surtax on all income above $118,500. That’s an enormous tax hike, which would generate exactly the same pushback you’d get if you announced, well, a 12.4 percent surtax on all income above $118,500. And as the committee notes, with admirably dry understatement, “a tax increase that large would make it politically challenging to raise more revenue from the wealthy, if at all.”

By that point, the top marginal tax rate would be well above 50 percent — closer to 60 percent in high-tax blue states. That would pretty much exhaust our fiscal capacity to tax the wealthy, meaning that any new program that liberals want to implement, from early-childhood education to high speed rail, will have to come paired with an announcement that middle-class taxes will be rising significantly to pay for it. And, not even mentioned, the current programs we have to find money for, such as Medicare. Even assuming we could get such a large tax hike through Congress, is expanding retirement benefits really the one place we want to spend all the money?

Moreover, increasing the tax cap won’t even raise enough money to cover Social Security’s costs unless we also break the link between payments and benefits. Otherwise, we’ll run a surplus for a few more years, then pay out a lot of that surplus in the form of higher benefits. Progressives should think long and hard about whether they want to break that link. Social Security’s great political strength is the perception that beneficiaries have earned their benefits with previous payments. The more clearly untrue that statement becomes, the more political risk there is to the less well-off beneficiaries.

What to do about America’s anorexic retirement accounts? Friends, this isn’t an easy one. What do you think? Leave a comment.

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