Social Security and Medicare
Retirement is a time to enjoy the fruits of your labor, but it also comes with important financial and healthcare decisions. Two of the most significant government programs that retirees rely on for providing income and health care are Social Security and Medicare. It is important to have a good understanding of these programs in order to make sound decisions when applying for benefits. This outline should provide a primer of these programs.
Social Security
The Social Security Act was signed into law in 1935 as part of President Franklin Roosevelt’s New Deal. It was designed to provide income for retirees, people with disabilities, and survivor benefits. Today, it’s a vital source of income for retirees, assisting them in maintaining their pre-retirement standard of living. It is funded through payroll taxes, with workers and employers each contributing 6.2% of wages up to $176,100 in 2025.
In order to be eligible for Social Security benefits, individuals must have accrued a minimum of 40 quarters of employment. Spouses may receive benefits based on the higher earner’s record if they don’t meet this requirement. The earliest age a retiree can start to collect Social Security benefits is 62, but doing so will permanently reduce your monthly benefit. For example, if your full retirement age is 67, claiming at 62 means a 30% permanent reduction in benefits. Full retirement age varies and is based on your birth year. If you delay claiming benefits until after your full retirement age, your monthly benefit will increase by 8% per year until reaching a cap at age 70.
Social Security benefits are calculated based on your highest 35 years of earnings. If you haven’t worked for 35 years, the missing years will be counted as zero, this could reduce your benefit. The Social Security Administration uses your earnings history to calculate your Average Indexed Monthly Earnings; your benefits are then based on a percentage of this amount. Therefore, retirees need to consider both their work history and age before filing for benefits, as this will affect the amount of Social Security income they can expect throughout retirement.
Another consideration is that the IRS taxes Social Security benefits if your combined income exceeds certain thresholds. Currently, 85% of benefits would be taxable if an individual’s total income exceeded $34,000. For joint filers the threshold is $44,000. In addition to federal income taxes, some states also tax your benefits. These rules vary from state to state.
An Earnings Test applies if you begin collecting Social Security benefits before your full retirement age while still working. In 2025, this means your benefit will be temporarily lower by $1 for every $2 you earn above $21,240 per year. However, it's important to understand that these adjustments lead to an increase in your Social Security payments once you reach your full retirement age. At that point, your earnings will no longer affect your benefits.
Medicare
Medicare is a federal healthcare insurance program for individuals aged 65 and older and for some younger individuals with disabilities or certain medical conditions. It was introduced by President Lyndon Johnson in 1965 and became operational in 1966. It’s comprised of 4 main parts: A, B, C and D.
Part A is referred to as Hospital Insurance, it covers inpatient hospital stays, skilled nursing facilities, hospice care, and home healthcare services. Most people qualify for premium-free Part A if they worked at least 10 years. The deductible for 2025 is $1,676 per benefit period.
Part B is referred to as Medical Insurance, it covers outpatient services such as doctor visits, diagnostic tests, medical equipment and preventative services. The monthly premium for Part B is $185, and the annual deductible is $257 in 2025.
Part C is made up of Medicare Advantage plans. These plans are offered by private insurance companies, who bundle Parts A and B coverage along with additional benefits such as vision, dental, hearing and prescription drugs. The Federal government subsidizes these plans, and the private insurer typically adds costs to account for the upgraded benefits.
Part D covers prescription drugs through private insurance plans. In 2025, Part D plans have a $2,000 annual out of pocket spending cap for prescription drugs.
If you are receiving Social Security benefits when you turn 65, you will be automatically enrolled in Medicare Part A and B. However, if you are not receiving benefits, you must manually sign up for Medicare during your Initial Enrollment Period. Your Initial Enrollment Period begins three months before your 65th birthday and ends 3 months after; missing this window may result in a penalty and delay in coverage. Individuals who are covered by an employer-sponsored group health plan past 65 may qualify for a Special Enrollment Period to enroll in Medicare without penalties once that coverage ends.
Conclusion
Navigating Social Security and Medicare requires careful planning and timely action in order to maximize benefits while minimizing cost. By understanding eligibility requirements, enrollment processes and associated costs, retirees can secure their financial future and healthcare needs effectively. Some steps that you can take now include reviewing your earnings record at “my Social Security account” at www.ssa.gov, comparing original Medicare versus Medicare Advantage plans based on coverage needs, and regularly reviewing updates to Social Security and Medicare policies that could affect your benefits.
Dan Krstevski, CFP®