Like the proverbial fluttering of the butterfly's wings that may eventually combine to create a great hurricane, recent changes to Medicare and Social Security rules have gathered into a perfect storm that potentially affects the retirement security of millions.

Seven new requirements and administrative actions enacted over the past three years, each considered on their own to have little impact, add up to a significant erosion of the value of Medicare and Social Security benefits both to current and future retirees.

Three types of rule modifications have been responsible for eating into retirees' finances:

Medicare means testing (which determines how much a beneficiary will have to pay for Medicare Part B and Part D premiums, based on income).
Social Security cost-of-living adjustments (COLAs – benefit increases to account for inflation).
Social Security claiming strategies (that is, a beneficiary's ability to apply for, but defer receiving benefits to increase their future value).

The changes were initially intended to affect only wealthier Americans, but because some of these changes involved either reducing income thresholds or putting off automatic increases to the thresholds, the combined result is to push the impact to lower incomes.

With the new rules affecting their purchasing power, retirees have seen either no increase to their Social Security benefit or have had their increased monthly retirement overshadowed by higher Medicare premiums.

Effects of new rules on retirees, future retirees

Future middle-income retirees may find themselves in higher Medicare premium brackets because the indexing to inflation of the means-testing thresholds has been deferred by Congress to increase the longevity of Medicare and Social Security trust funds.

It will not be unusual for retirees to experience lifetime benefit losses from $37,000 to $57,000 or more due to these “insignificant” changes.

Unfortunately, these piecemeal changes will not result in the long-term reform that will be needed to preserve the value and affordability of Medicare for average retirees in the upcoming years.

Politics seems to be getting in the way of developing comprehensive, equitable solutions. Until the issue is addressed, it will be important for both current and future retirees to carefully examine their own situations and seek strategies to maximize value.

Proactive measures to take

This short article only summarizes some of the general challenges retirees and active employees may face in retirement. Here are several important steps to consider:

1. Review your financial circumstances and retirement plans with a competent financial advisor. Depending on your age, there may be savings and investment approaches that can help offset or reduce inflationary and government policy impacts.

2. Seek the advice of a tax professional to understand how both pre- and post-retirement income may impact your tax liability and costs for Medicare premiums. Again, there may be ways to minimize how much of your income goes to the government.

3. Consider the breadth of options for your retiree health insurance. There are lower cost alternatives with Medicare Advantage plans in many areas, and premiums for Medicare supplement plans can vary a lot. It pays to shop around, and Medicare exchanges can assist with finding affordable coverage to meet your needs.

4. Take an active role in discussing these financial security issues with the above professionals. Ask specific questions about how Social Security and Medicare rules will affect your own situation so that you are sure an advisor is addressing the concerns.

The earlier you begin planning for Social Security and Medicare contingencies and strategizing to reduce the impact of government benefit erosion on yourself, the more choices you will have.

We don't know how future legislation and regulation of federal entitlement programs could affect us. But that's why it is so important for us to take control of the things we can and obtain trusted advice from those who have expertise and remain current on these issues.

Nick Gedestad is with Keenan & Associates. Since starting at Keenan & Associates, Nick has focused on providing education and solutions for retirees of public agencies, community college districts, and school districts in the state of California. During this process, Nick has worked with agencies of all sizes to understand their retiree strategy and develop economic models to find unique solutions to individual goals.

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Social Security & Medicare rules: How a few 'insignificant' changes add up

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