Social Security checks will be going up by 2.0% in 2018, perhaps!
Some people will realize little or none of their cost of living adjustment (COLA). Because of how the hold-harmless unwinding works after a year (or years) in which some Social Security beneficiaries Medicare premiums were held artificially low because their annual COLA didn’t cover the rise in premiums, we may see the situation where lower-income Social Security beneficiaries have their entire COLA absorbed by Medicare premiums while higher-income Social Security beneficiaries get to enjoy their full COLA and unchanged or even lower premiums.
More money out of your pocket?
The hold harmless provision protects Social Security recipients from having their checks reduced if the Medicare premium rises by more than their COLA amount. This goes back to 2010, when the COLA for that year (announced in 2009) was 0%. The 2010 Part B premium rose to $110.50 from $96.40. In order to keep Social Security checks from dropping by $14, the 70% of beneficiaries who were having their Medicare premiums deducted from their Social Security checks in 2009 were held harmless from the premium increase.
Their premiums stayed at $96.40 while the 30% of beneficiaries who were not having their premiums deducted in 2009 — because they: 1) didn’t enroll in Medicare until 2010; 2) were delaying Social Security and paying Medicare premiums out of pocket; or 3) were subject to the Income Related Monthly Adjustment Amount because their income was over $85,000 (single) or $170,000 (joint) — had to pick up the slack. Their premium that year was set at $110.50, a 14% increase over 2009.
2011 was another zero-COLA year. So even though the Part B premium was raised to $115.40 from $110.50 (a 4% increase), 70% of all Social Security beneficiaries did not pay it because there was no COLA. Their premium stayed at $96.40 and their Social Security checks remained unchanged.
Medicare premiums play catchup!
In 2012 we saw what happened when all of this unwound. The COLA jumped 3.6%. This allowed nearly everyone to catch up on their Medicare premiums. A person receiving $1,300 a month would get an increase of $46.80, which would more than cover the increase in the Medicare premium. And with more people now able to pay the full amount (not just the 30% who were not held harmless), the premium dropped to $99.90 from $115.40. Those who had been held harmless saw their premium rise to $99.90 from $96.40, but they barely noticed it because their Social Security checks went up by 3.6% (minus the $3.50 for the higher Medicare premium). Those who had been paying the full $115.40 saw their Social Security checks go up by 3.6% plus another $15.50 as their Medicare premiums dropped to $99.90. (Not counting the various Income Related Monthly Adjusted tiers here, but the effect was the same: they all enjoyed a drop in Medicare premiums.
From 2013 through 2017 we saw a much more complex hold-harmless situation, as each year the COLA has been enough to cover some, but not all, of the increase in certain individuals’ Medicare premium depending on the amount of their benefit and the amount of their premium. For example, if a person’s benefit was $1,300 in 2016, the 0.3% COLA gave them an increase of $3.90. If they had been paying $104.90 in Medicare premiums (as a result of being held harmless two years prior), their 2017 premium is $108.80 ($104.90 + $3.90). If someone else got a $6 COLA, their premium is $110.90.
Now we may see another unwinding. The 2% COLA for 2018 will give many people enough of a raise to allow them to catch up. That same person who is receiving $1,300 and paying $108.80 will get a $26 raise. If the Medicare premium remains unchanged at $134, they will now be able to pay it because the COLA will just cover the $25 increase in premiums (to $134 from $109). They will see a net $1 increase in their Social Security check in 2018.
Medicare premiums, up, down or the same?
As for the base premium itself, it’s possible that it could remain the same or even go down, because it is now being shared by more people, thanks to the 2% COLA. The premium determination involves trustees’ gathering information from a variety of sources in order to project monthly, per-capita health care costs under Medicare for the coming year. They take 25% of those costs (the federal government pays the other 75%) and divide by the number of beneficiaries who have Part B, in proportional amounts depending on how much of the premium they end up paying (based on the hold harmless provision described above) and which income tier they fall into. With more people able to pay, the base premium could drop, as it did in 2012. We’ll find out in November.
In the end, those receiving lower COLA increases (i.e., because they have lower benefit amounts) will see less of their COLA (or none at all) because it will be absorbed by premiums. Conversely, people with higher COLAs could see the full amount (or even more) if their Medicare premiums stay the same or go down.
The way Social Security Cost of Living Adjustments apply to Medicare can be very confusing. Once the Trustees determine the cost of Medicare Part B, I will be providing a blog that will explain what to expect.
To learn the ins and outs of Social Security claiming strategies and to help you prepare for your Medicare years, please click Retirement Refined and click on Educational Workshops for a listing of our upcoming workshops.
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