What Inflation Means for Social Security and Medicare

This post originally appeared on The Finance Buff.

The Congressional Budget Office (CBO) Director’s Blog is one of my favorite ways to stay current with issues that affect the financing of federal programs. The 22 April 2009 post explained why CBO projects no cost of living adjustments (COLA) for Social Security in 2010 through 2012 and the implications for the Social Security taxable maximum. A follow-up post on 23 April 2009 explained the implications for Medicare Part B premiums. Below I summarize what the director communicated in those two posts.

The Social Security COLA is based on the consumer price index for urban wage earners (CPI-W). Social Security benefits cannot be reduced and they will only increase if the CPI-W climbs to new highs. CBO projects that for the next three years the CPI-W will stay below the value it attained toward the end of 2008. If this projection holds, Social Security benefits would remain at their 2009 values for the three years 2010-2012. Benefits provided by other federal programs with COLAs tied to that of Social Security would also see no increase in these years (includes civil service and military retirement, as well as veterans’ compensation and pensions benefits).

That’s the bad news for those receiving Social Security and other federal retirement benefits. The good news for wage earners is that the maximum amount of wages subject to Social Security payroll tax (the so-called “taxable maximum”) would stay fixed too because it only rises as COLAs rise. The taxable maximum for 2009 (and projected for 2010-2012) is $106,800 (historical values here).

There is, however, good news for some Medicare beneficiaries. Since 1996 the Medicare Part B premium for most beneficiaries has been set at 25% of the cost of Part B coverage. In 2009 the Part B premium is $96.40(*) per month (see this Congressional Research Service report for past premium values). For some Medicare beneficiaries this 2009 value would hold steady through 2012 if, as CBO projects, the CPI-W stays below its peak over that period. This “hold harmless” provision applies to 75% of Medicare beneficiaries who have their Part B premium withheld from their Social Security check. The hold harmless rule is that the Social Security check after Medicare withholding cannot decrease. That limits the Medicare withholding increase to be no larger than the Social Security COLA. No COLA, no additional Part B premium.

But, this situation does not apply to the quarter of Medicare beneficiaries who fall into any of the following categories: (1) new enrollees in Part B, (2) enrollees who pay an income-related premium, or (3) those who do not have the Part B premium withheld from their Social Security check (most of whom have their premiums paid by Medicaid).

These beneficiaries (or, through Medicaid, their state governments) would be hit with a double whammy. Not only would they not benefit from the zero COLA (in the sense of their Part B premiums holding constant) but their premiums would rise an additional amount to compensate for the revenue lost due to the other 75% of of premiums that would stay flat. The increase would be nearly four times larger than it would be if everyone’s premiums went up. CBO expects the monthly premium for these unlucky beneficiaries to be $119 in 2010, $123 in 2011, and $128 in 2012, while premiums for the hold harmless beneficiaries would stay at $96.40 per month (*).

Medicare prescription drug plan premiums are not subject to a hold harmless rule for anyone. If they go up, as they are expected to do, beneficiaries pay the higher premium whether automatically deducted from their social security check or not. Therefore, the six million or so Medicare beneficiaries with drug premiums deducted from their social security check will see their net social security payment decrease.

Medicare is many things and one of them is a complicated and confusing mess.

(*) As confirmed by an e-mail exchange with CBO staff, all premium amounts reported by CBO and, thus, in this post apply to individuals and couples who do not face income-related premium adjustments. For those with sufficiently high incomes premiums would be even higher.  (Hat tip: bob u. of the Bogleheads Investment Forum.)

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