Bob’s Journal for 8/18/22

New Law to Reduce Seniors’ Prescription Drug Costs

There are several provisions in the newly enacted Inflation Reduction Act that are designed to reduce the out-of-pocket costs of Medicare beneficiaries.

The biggest change for most beneficiaries takes effect January 1, 2024. You might be familiar with the coverage gap, or doughnut hole, in Part D prescription drug policies.

Though the details have changed over the years, when a beneficiary’s prescription drug spending for the year exceeds a certain level, the beneficiary is responsible for most of the subsequent medicine costs.

Then, after total medicine spending for the year hits a second level, most of the beneficiary’s prescription drug costs for the rest of the year are covered by insurance.

The new law changes that. Beginning in 2024, the out-of-pocket prescription drug costs for a beneficiary will be capped at $2,000. Medicare and drug manufacturers will share all medicine costs exceeding $2,000 per beneficiary. About 1.4 million Medicare beneficiaries have annual prescription medication costs exceeding $2,000.

Another provision limits the monthly cost of insulin to $35 for those under Part D policies. That takes effect in 2023.

In addition, Medicare beneficiaries won’t be charged for most vaccines beginning in 2023.

The new law also limits increases in Part D policy premiums to no more than 6% from 2024 to 2029.

The Medicare provision that made the most headlines authorizes the Centers for Medicare and Medicaid to negotiate prices for some drugs with their manufacturers.

Beginning in 2026, Medicare will negotiate prices for 10 drugs taken from a list of the 50 drugs on which the program spends the most. The drugs must have been on the market for nine or 13 years, depending on the type of drug, and not have generic competition. Additional medications will be subject to price negotiation in subsequent years.

A provision that hasn’t received as much attention requires drug manufacturers to pay rebates to Medicare when the price increase for a drug exceeds the inflation rate.

Many People Misunderstand Retirement Risks

A retiree faces a number of risks, and a goal of retirement planning is to eliminate or reduce those risks. But most retirees don’t accurately identify or assess those risks, according to a study by the Center for Retirement Research.

The key risks in retirement are longevity, markets, health, family and government policies, according to the study.

The authors used various data to objectively assess, quantify and rank the risks. Then, the authors compared their ranking to the subjective assessments of the risks made by retirees.

The study found that the subjective assessments by retirees differed greatly from the objective ranking, putting retirement independence and security at more risk than most retirees realize.

The objective ranking of retirement risks concluded the top risks from highest to lowest were longevity, health, markets, family and policy.

The subjective rankings by retirees ranked the risks from greatest to least as follows: markets, longevity, health, family and policy. More importantly, except for market risk, the risk levels the retirees assigned were less than half those of the objective assessments.

The study concluded that most retirees exaggerate the importance of market volatility. They also are too pessimistic about their likely longevity and underestimate the potential for high health care costs late in life.

A consequence is retirees place the wrong emphasis in their retirement plans and strategies. In particular, they don’t place enough emphasis on guaranteed lifetime income through Social Security and annuities. They also apparently don’t understand that guaranteed lifetime income hedges market risks.

Social Security Options for the ‘Unretired’

A lot of people left the work force early in the pandemic, retiring before originally planned. More recently, many of those people concluded that they’d like to return to the labor force.

These premature retirees who began to receive their Social Security retirement benefits have some options to reverse their Social Security decisions.

There are several reasons someone who’s returning to the work force might want to “turn off” Social Security benefits.

When you aren’t yet at full retirement age, all or a portion of Social Security benefits are suspended if your earned income exceeds a low amount. You eventually receive the benefits, but it will be years later.

In addition, delaying the benefits lets you take advantage of delayed retirement credits, increasing the monthly benefit you eventually receive.

When you’ve been receiving Social Security benefits for no more than 12 months, you can file a Request for Withdrawal of Application and repay all the benefits received. Then, Social Security suspends benefit payments until you apply for them again and treats you as though you never applied for benefits.

You have to repay the gross benefits you received, including any deductions taken for Medicare premiums and income taxes. In addition, if someone else, such as a spouse, is receiving benefits based on your work record, those benefits also will stop and have to be repaid.

The request for withdrawal can be made only in person. The form can’t be filed online.

When you received benefits for more than 12 months, withdrawing the application isn’t an option.

If you haven’t yet reached full retirement age and have been receiving benefits for more than 12 months, your only option is to wait for full retirement age.

When you are at least full retirement age, you can suspend the benefits at any time. Social Security will stop paying them. Plus, you’ll receive delayed retirement credits for each month after the suspension that you delay claiming the benefits, until you reach age 70.

You won’t receive any delayed retirement credits for the months that benefits were received. But with the suspension you don’t have to repay any benefits received.

Anyone receiving benefits based on your earnings record also will have their benefits suspended.

The Data

Retail sales in July were unchanged from June’s level and June’s retail sales increase was revised down to 0.8%.

Excluding vehicles and gasoline, retail sales increased 0.7% in July.

Consumers change their spending mix as prices change. In July, declining gas prices allowed consumers to shift spending to other goods and services.

Home prices rose to a record high in the second quarter, according to the National Association of Realtors (NAR). The median sales price for an existing single-family home increased 14.2% over 12 months to $413,500. In more than 80% of 185 metro areas reviewed, the median home price increased by more than 10% over 12 months.

Higher home prices, combined with higher mortgage rates, drove housing affordability in June to its worst level since 1989, according to the NAR.

Reduced affordability is why existing-home sales have declined for five consecutive months.

The new home market also is affected. The Housing Market Index declined to 49 in August from 55 in July, according to the National Association of Home Builders (NAHB). Any reading below 50 indicates the market is contracting.

The August level is the lowest since May 2020. The declines in July and August combined for the third-largest, two-month decline on record for the index.

The index has declined for eight consecutive months, which has happened only two other times. Each of the two previous periods were followed by sharp declines in home values.

Home starts declined 9.6% in July from June’s level and fell 8.1% over 12 months.

Single family home starts declined 10.1% from June to July and 18.5% over 12 months.

The Producer Price Index (PPI) declined by 0.3% in July after increasing 1.1% in June. Over 12 months, the PPI increased 9.8%, which was down from 11.3% in June.

The core PPI (excluding food and energy) increased 0.2% in July, following a 0.4% increase in June. Over 12 months, the core PPI increased 7.6%, compared to 8.2% in June.

Industrial Production increased 0.6% in July. June’s reading was revised higher to indicate no change from May. Manufacturing production increased 0.7% in July.

Manufacturing activity in the New York area tumbled in August. The Empire State Manufacturing Index fell to negative 31.3 from 11.1 in July.

The Consumer Sentiment Index from the University of Michigan improved to 55.1 in mid-August from 51.5 at the end of July.

New unemployment claims increased to their highest level in 2022 in the latest week. The number of new claims had hit a 50-year low in March.

New claims increased to 262,000 from a revised 248,000 the previous week. Continuing claims increased by 8,000 to 1.43 million.

The Markets

The S&P 500 rose 4.46% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 4.42%. The Russell 2000 increased 5.68%. The All-Country World Index (excluding U.S. stocks) added 2.41%. Emerging market equities returned 2.23%.

Long-term treasuries lost 1.66% for the week. Investment-grade bonds increased 0.67%. Treasury Inflation-Protected Securities (TIPS) fell 0.20%. High-yield bonds gained 1.16%.

In the currency arena, the U.S. dollar gained 0.21%. Energy-based commodities fell 0.14%. Broader-based commodities rose 3.03%, while gold declined 1.06%.

Bob’s News & Updates

My latest book is “Where’s My Money: Secrets to Getting the Most out of Your Social Security.” It tells you clearly what your benefit options are in different situations and how to determine the best choice for you. You can find it on Amazon.com or Regnery.com.

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