It’s Heath Care, Stupid!

I am a retirement planner, so I am always talking to my clients about issues that concern them. At the top of many lists is health care. Health care is also one of the more polarizing issues to discuss. For this article, I am going to focus on Medicare and the soaring costs associated with it.

To really understand what is happening, we have to take a look at history. In 2003, Congress passed the Medicare Modernization Act of 2003. This act did several things, but for the purposes of this article, I am going to focus on three things.

The first thing this law did was tie Medicare and Social Security together. You cannot get one without the other. This is the advent of Medicare becoming your primary health insurance and your private health insurance becoming your secondary coverage. Before this, you did not need more than one health insurance plan necessarily.

The second thing this law did was define modified adjusted gross income (MAGI). You might find it strange to see a MAGI calculation in a piece of Social Security legislation, but it will make sense in a moment. The third and final thing this law did was make Medicare “means tested,” so that your Medicare Part B premiums are based on your income. In other words, the more you make, the more you pay.

It is estimated that $5 trillion sits in the hands of baby boomers in what we call “qualified money.” Qualified money refers to 401(K), 403(b), IRA etc., and when you turn 70 and a half, you are required to start taking this money out in the form of your required minimum distribution or your RMD. Baby boomers are traditionally thought of as the group born between 1946 and 1964. The first group of baby boomers turn 70 and a half in 2016. As those baby boomers start taking money out of their qualified money, their modified adjusted gross income is going to increase.

Now that they have tied your Medicare Part B premiums to your income, what is that going to do to your Medicare premiums? It means that they are going to increase. Now that they are deducting your Medicare premiums directly from your Social Security payments, what is that going to do to your Social Security payments? It means your Social Security payments are going to decrease. If you have followed me this far, you can see that this is Social Security reform.