Wednesday, November 30, 2016

The Conversation You’d Better Have with your Financial Advisor: Medicare Reform

The Conversation You’d Better Have with your Financial Advisor: Medicare Reform

Don’t Be Distracted by a Tax Break:  This missive is addressed to middle-aged Americans who are gainfully employed and receiving health insurance benefits through your employer.  I urge you begin looking at (or if you don’t have one, thinking about) your retirement plan in the coming months.  Your financial advisor is likely to tell you about all the potential breaks that may find their way into a major piece of tax legislation next year.  Whether you are a Democrat, Republican or Independent, you’ll look favorably upon a bill that saves you a little bit of money.  However, the tax bill is prelude to and will make a necessity of entitlement reform.  Once the new Congress and President have eliminated hundreds of billions in revenues and repealed the Affordable Care Act, they will have to “reform” Medicaid and Medicare[1].

A joint effort with my 3-1/2 year old granddaughter

Since you are gainfully employed, you probably don’t think Medicaid reform will have a bearing on your long-term wellbeing.  You are probably right, but you’d be surprised how many elderly people burn through all their savings and wind up on Medicaid at the end of their lives.  For now, we’ll set that aside as a remote risk. 

An assumption about health insurance in retirement that won’t be valid anymore:  It’s Medicare reform that should be getting your immediate attention.  You have probably assumed that you don’t need to plan on spending large parts of your retirement income on insurance premiums, co-pays, and deductibles.  Between Medicare Parts A, B and D and supplemental insurance, you think you’ll be fully covered in retirement.  What you haven’t done is to build the potential costs of hospitalization, doctors, or drugs that won’t be covered under Medicare reform.  You’d better start getting familiar with Speaker Paul Ryan’s Medicare reform plan and Health and Human Services Secretary-designee Tom Price’s health care reform proposal, because they intend to shift the risk of health insurance onto you.

The government will, undoubtedly, continue to provide a subsidy for senior health care, but the subsidy will not cover the cost of today’s Medicare’s suite of services, and you are going to have to go into a marketplace to buy the insurance from private insurance companies.  Sound familiar?  While the House Speaker would vehemently deny it, his reform looks like Obamacare for seniors.   

If you get insurance through your employer, the real cost will shock you: If you get your insurance through your employer, you have no idea how much insurance really costs unless you work in H.R.  Many of my friends with employer-provided health insurance complain about rising co-pays and deductibles.  The increases are tiny compared to increases in cost for small businesses and individuals  (see,  You might ask someone who is running a small business or buying an individual policy to give you a ballpark figure.  You are going to face that figure, less a subsidy, plus a great deal of health care inflation.

The details of Medicare reform are uncertain, the consequences to retirement plans will be material:  At this point, we don’t know who will remain eligible for the current Medicare program, and we don’t know what the subsidy will be.  What we do know is that the bigger the tax cut, the less room Congress will have to grandfather in some beneficiaries and provide money for insurance subsidies.

Many middle-aged folks aren’t saving enough for retirement as is.  Medicare reform is going to make the financial road to retirement even steeper or keep you in the work force even longer.

Don’t tell me this isn’t going to happen because Congress would never privatize Medicare.  I didn’t think Donald Trump would become President either.  The forces are in place to privatize Medicare, and the negative consequences aren’t immediate.   Thus there’s every possibility that while you are gleefully spending your tax cut next year, Congress and the President will be creating a huge hole in your retirement security.  You might ask your financial advisor how much you should be setting aside to cover your health insurance needs after you retire.

[1] Although Medicare funded through a payroll tax, its dwindling surplus is invested in US Treasuries.  In other words, Medicare’s surplus mitigates the deficit.  As tax revenues are slashed and the Medicare surplus dwindles, Congress will feel immense pressure to extend the Medicare surplus to keep the deficit from exploding.

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