Chris Stein, CFP®
Social Security COLA and Medicare Premiums
The fact that Medicare premiums are affected by Social Security cost of living adjustments (COLAs) is a little known “side-effect” to a rule put in place by Congress to protect those receiving Social Security while in the Medicare system.
Most people over age 65 are participating in the Medicare system. Medicare Part A, sometimes called “Hospital Insurance”, has no premium as long as you qualify for coverage by having paid into the SS system for at least 10 years. Medicare Part B, or “Medical Insurance”, does have a monthly premium involved even after you have “qualified” for Medicare. In 2015 the standard premium is $104.90 per month. Some higher wage individuals will pay more, but most pay $104.90.
Like most things, the cost of medical insurance has been going up. Each year the Centers for Medicare & Medicaid Services (CMS) sets the Part B premiums based on updated expense estimates. This will cause the Part B premium to go up when expenses to the system go up, which it did from 2012 to 2013 when the premium increased from $99.90 to the current $104.90. There have been no Part B premium increases since 2013. At the time of this writing the CMS is anticipating the expenses to the Medicare system to be increasing as we go into 2016 and will justify a premium increase for 2016. This is where things start to get complicated.
Social Security has a provision called “hold-harmless”. This provision provides protection for those people who are receiving SS benefits and paying their Medicare Part B premiums via withholding from their SS benefits. These recipients are protected from a “net decline” in the monthly amount they receive if that decline is solely due to an increase in the Part B premiums. In other words, if your SS benefit does not go up you will not pay a higher Part B premium in the next year. Currently the anticipated COLA for SS retirement benefits for 2016 is a nice big ZERO.
No COLA Adjustments
This leads us to a situation we have seen once before. In 2010 and 2011 there was no COLA adjustment to SS benefits. This meant that those people already receiving SS and in Part B had their Part B premiums FROZEN at the 2009 level of $96.40. However, “new” applicants to Part B and those paying their premiums out of pocket experienced premium increases to $110.50 in 2010 and $115.40 in 2011. This was due to the increasing costs of Medicare benefits, but the entire increase was placed on the backs of the 30% of Medicare participants who were not paying their premiums via the SS withholding. The other 70% were protected from increases to premiums due to the “hold-harmless” provision. In 2012 things equalized since there was a SS COLA which opened the door to Medicare spreading the costs to everyone rather than disproportionately to the 30% not protected. This caused the premiums for everyone to be $99.90, which was actually a DECREASE for those who had seen the increases in 2010 and 2011.
The same storm is coming in 2016, but possible to a much larger degree. It is anticipated that if the SS COLA does turn out to be zero (we will know by November), the entire increase in Medicare costs for 2016 will be borne by the 30% of un-protected participants, resulting in their premiums increasing by about 52%!! This is compared to the more modest 14.6% increase in 2010 and 4.4% increase in 2011. This may cause the premiums for those unprotected by the “hold-harmless” provision to jump at least $55 per month!
Once SS COLAs kick in again we should see a leveling of the premiums for everyone like we saw in 2012, but for 2016 there may very well be a significant difference in premiums for the 70% versus the 30%. There are not many strategies to avoid this, but if you think you will be caught in this situation please reach out to us ASAP to see if there are options. The few options available are quickly evaporating.
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