My Top 3 Take-Aways from this Medicare Trustees Report (And Why They Matter to Your Clients)

I love government reports. 

Okay, I don’t *love* government reports. They are dense. They often contain distressing news. They can hurt your eyes to read. 

But they are also filled with valuable information - insights that can help financial advisors better prepare their clients for what lies ahead. 

Don’t believe me? Just look at the 2024 Annual Report of the Board of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds.

(Yes, that’s the actual report name.)

What the report lacks in catchy titles and pleasing design, it makes up for in insights for U.S. savers - especially higher-net-worth savers like many of our clients. 

So why should the 2024 Annual Report of the Board of Trustees of the… (you know what, let’s just call it the 2024 Annual Report) matter to our clients? 

This report, published by the Centers for Medicare and Medicaid Services (CMS), talks about something very important to Baby Boomers and near-retirees: the costs they could incur under Medicare. 

As you likely know, there are two primary ways U.S. savers pay for Medicare services. The first is through the premiums that savers pay for their Medicare Part B and Part D plans. The second is through additional surcharges that some savers incur based on their level of income. These surcharges - called the Income Related Monthly Adjustment Amount, or IRMAA - are additional fees higher-earning savers pay on top of their premiums. 

Premiums and IRMAA are taking up a growing portion of savers’ retirement income, and the 2024 report explains why. 

In case you don’t feel like reading through all 261 pages of the report, I’ve summarized a few key takeaways below. 

Here are my top three insights from the report:

#1 | Good News… Or Is It? 

The Medicare Part A Trust Fund - the one that covers hospital insurance for America’s retirees - is in deep trouble. It’s expecting significant shortfalls in the years to come.

However, when it comes to the Trust Funds for Medicare Parts B and D, the outlook is much rosier. As the report says: “The SMI trust fund is expected to be adequately financed over the next 10 years and beyond.”

Great news! 

Or is it…?

The report goes on to explain WHY the SMI trust fund will not experience shortfalls in the years ahead: “Financing for the SMI trust fund is adequate because beneficiary premiums [and surcharges] are established annually to cover the expected costs for the upcoming

year. Should actual costs exceed those anticipated when the financing is determined, future financing rates can include adjustments to recover the shortfall.”

Did you catch that? 

The trust funds will be okay because the government can just raise premiums and IRMAA rates to meet funding needs - however high they go.

#2 | A Growing Burden on U.S. Savers 

The Trustees know this cost will be borne by savers. The report states: “A critical issue for the SMI program is the impact of the rapid growth of SMI costs, which places steadily increasing demands on beneficiaries and taxpayers.”

Beneficiaries and taxpayers. As in - our clients. 

The report continues, “As SMI per capita benefits grow faster than average income or per

capita GDP, the premiums and coinsurance amounts paid by beneficiaries represent a growing share of their total income.”

That’s government-speak for: Program costs will grow faster than increases in income. So, more of our clients’ retirement income will go toward premiums and IRMAA, and less will go into their pockets to spend.

#3 | A Sneaky Way to Reduce Social Security Benefits

Many savers have their IRMAA directly withheld from their Social Security checks. So, future increases to premiums and surcharges will effectively reduce the amount of Social Security deposited in a saver’s bank account. 

And just how much of a saver’s Social Security check is IRMAA and premiums expected to consume? 

The report notes, “Average beneficiary premiums and cost-sharing payments for SMI will increase… Thus, a growing proportion of most beneficiaries’ Social Security and other

income would be necessary over time to pay total out-of-pocket costs for SMI, including both premiums and cost-sharing amounts.” 

(“Cost sharing amounts” is a polite way of saying IRMAA.)

In 2024, the report notes that premiums and IRMAA for Parts B and D equal about 26% of the average Social Security benefit. And it’s expected to rise in the years to come.

So What Does it Mean for Your Clients?  

As I mentioned in my blog post earlier this year on IRMAA driving legislative risk, there are two ways we can help our clients mitigate the impact of IRMAA today - and protect them against the very real risk of rising IRMAA fees in the future. 

Stonewood just launched our new Roth Done Right software, which analyzes taxes and IRMAA for your clients. So if you need a turn-key way to evaluate the following for your clients, schedule a call here, and we’ll show you how easy it is to use.

1. First, we can help savers diversify the tax status of their retirement accounts through Roth and other tax-free conversions. Why does this help? For the purposes of IRMAA, the SSA calculates a saver’s MAGI based on taxable income from 401(k)s, IRAs, working income, and the taxable portion of their Social Security benefit. However, income from Roth accounts does not count toward MAGI for the IRMAA calculation. By accessing retirement funds from a Roth account in the future, your client can potentially lower or eliminate their IRMAA surcharges. 

2. Second, IRMAA is an important consideration as you structure a client’s Roth conversion. As you analyze your client’s conversion, it can be important to evaluate: 

• The total taxes and IRMAA fees expected to be paid if a saver keeps the IRA versus converts the IRA to a Roth. This is the analysis that helps the client decide if a Roth conversion makes sense in their situation.
• Once a client has made the decision to convert, choose a conversion pattern that minimizes: 
  • Tax Drift: If additional income from a conversion pushes a saver into a higher tax bracket for a given year, the portion of the converted funds in that higher bracket will have a higher tax responsibility.  
  • IRMAA Drift: If the additional income from the conversion pushes the saver into a higher IRMAA bracket, they could pay more in fees during the conversion.

Whether our clients know it or not, the 2024 Annual Report of the Board of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds (whew) has a lot to say about the amount of retirement income they’ll get to spend in retirement… and the amount that will go to the government in fees and surcharges. 

And while we don’t expect our clients to keep up with the latest reports from Washington, they’ll sure be glad we did on their behalf.