Obama's Budget Proposals and Your Wallet
Your retirement income might get nicked but your prescription drug costs could shrink, if the president’s plan becomes law
President Barack Obama’s budget proposals are a mix of good news and bad news for older Americans.
The good news: You would save money if you have big pharmaceutical bills and fall into what’s known as the “doughnut hole” of the Medicare Part D prescription drug plan, out-of-pocket costs that aren’t covered by Medicare.
The bad news: You would get a smaller-than-expected Social Security retirement check and pay more for premiums in Medicare Part B, the portion that pays doctor’s bills for people 65 and older.
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2 Caveats About Obama's Budget
Before you read the details of these proposals, below, you should know two things:
First, they’re just proposals.
Will they be accepted by Republicans in Congress as part of a grand compromise to slow the growth of the nation’s huge budget deficit? Will the liberal base of the Democratic Party go along, considering that many of its members are angry at the president for what they consider a betrayal of New Deal principles?
Whether Obama’s budget proposals — or anything close to them — will become law is anyone’s guess.
Second, they’re for the U.S. 2014 fiscal year budget, which starts October 1, 2013. It’s important to remember that the sequester is already affecting older Americans in a variety of ways, from cutbacks in Meals on Wheels deliveries to increased waiting lists for home medical care assistance.
The sequester could have serious consequences for older unemployed Americans because it is expected to cut federal job training programs by more than $450 million, according to a recent report by the National Skills Coalition, an amalgam of employers, unions, public officials and education and training providers.
“Nearly 2 million fewer workers will have access to critical services that would help improve their skills for jobs employers need filled,” the report says. In particular, the federal program that retrains the long-term unemployed will be cut by almost $80 million, denying services to nearly 30,000 individuals, the National Skills Coalition says.
OK, now that the caveats are out of the way, here are details on the key proposals in Obama’s 2014 budget that could affect older Americans:
Smaller annual cost-of-living increases Next Avenue flagged Obama's proposed “Chained CPI” (Consumer Price Index) calculation in an earlier article, when the idea was first making the rounds in Washington.
Essentially, the Chained CPI means that Social Security’s inflation adjustments would take into account the way people alter their spending when certain prices rise – switching from beef to chicken, for instance, when the cost of beef shoots up. As a result, Social Security benefits would grow less; the Chained CPI grows, on average, about 0.3 percent a year more slowly than the standard CPI.
Obama's proposal calls for switching to the Chained CPI in 2015.
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Moving to the Chained CPI wouldn't significantly shrink the size of benefits in any one year, but could add up to quite a cut over time.
If the Chained CPI went into effect, says the National Women's Law Center, someone currently receiving $17,000 a year in Social Security benefits would receive a total of $890 less by age 80 than they would with the current inflation adjustment; the cuts would amount to a total of $1,139 by age 85 and $1,384 by age 90.
To ease the burden of the Chained CPI’s effects on the oldest Americans, there would be new, gradual Social Security benefit increases starting at age 76 and additional ones starting at age 95; the National Women's Law Center estimates don't take this into account because they were calculated before the president submitted his budget.
A ripple effect for all taxpayers Here’s something about the Chained CPI that hasn’t received much attention: It would also apply to the automatic annual increases in income levels for tax brackets, the standard deduction and personal exemptions. Some consider this a backdoor tax increase.
Higher Part B premiums Most Medicare beneficiaries pay $104.90 a month in Medicare Part B premiums. There’s a sliding scale of higher premiums (sometimes called a surcharge) for individuals with incomes above $85,000 or couples with incomes over $170,000; they pay between $146.90 and $335 a month.
But under Obama’s proposal, beginning in 2017, higher Medicare Part B premiums would affect millions of people over 65. Premiums would rise gradually until 25 percent of all beneficiaries owed the higher income-related payments, compared with just 6 percent today.
If the proposal had been implemented in 2012, individual beneficiaries with incomes of $47,000 or higher ($94,000 for couples) would pay the higher premiums, according to a report by the Kaiser Family Foundation.
There would also be a surcharge on Medicare Part B premiums for beneficiaries who choose to buy the most generous Medigap policies; the surcharge would equal roughly 15 percent of the average Medigap premium.
A new co-pay for home health care New Medicare beneficiaries could be charged a $100 co-payment for home health care visits starting in 2017.
A quicker closing of the prescription drug “doughnut hole” Today, Medicare beneficiaries pay a bigger out-of-pocket share of their Part D drug expenses when they are in the doughnut hole, which starts once you’ve spent $2,970 on prescriptions and ends when you’ve shelled out $4,750. The doughnut hole is scheduled to close in 2020. Under the budget proposal, that date would advance to 2015, reducing drug costs for Medicare recipients five years sooner.
A limit on retirement-plan contributions Next Avenue recently wrote that Washington is targeting 401(k)s and one of the president’s proposals does just that.
It would prohibit you from making additional contributions to your 401(k) or IRA once the total in your retirement plans hit $3 million (the amount needed today to buy an annuity producing $205,000 a year).
Just 0.06 percent of people with retirement accounts – 0.11 percent of those 60 and older – had assets of $3 million or more in them in 2011, according to the Employee Benefit Research Institute. About 36 percent of those with more than $3 million in IRAs are 50 to 69.
(MORE: How to Make Your Retirement Money Last)
But many younger people could ultimately hit that threshold. “Time, which allows savings to accumulate in these accounts, tends to increase the probability that younger workers will reach the inflation-adjusted limits by the time they reach age 65," the Employee Benefit Research Institute said.
In addition, if interest rates rise to earlier levels, the cap could drop to around $2.2 million, the amount needed to buy an annuity with an annual $205,000 payout, according to the institute. In this case, nearly 3 percent of retirement accounts would be affected.
Many small business owners will shut down their retirement plans or reduce contributions for workers if this proposal takes effect, predicts Brian H. Graff, executive director and chief executive of the American Society of Pension Professionals and Actuaries.
“These small business owners are being punished for doing right by their workers and saving and investing successfully,” he said.
Jack VanDerhei, director of research at the Employee Benefit Research Institute, told Forbes’ Janet Novack that “the administrative complexity could be fatal” for a small business owner.
You’ll want to keep an eye on the congressional negotiations with Obama to see whether this proposal, or any of the ones mentioned earlier, will ultimately hit your wallet.