Social Security COLA could get wiped out by Medicare costs

But higher-income retirees' health insurance costs might remain the same.

Consider this perverse scenario. Next year, typical retirees could see their expected Social Security cost-of-living adjustment for 2018 virtually wiped out by a big jump in Medicare premiums, but premiums for many higher-income clients could remain the same as 2017.

Blame this potentially bizarre situation on the “hold harmless” provision that is designed to protect most retirees from a net decline in Social Security benefits from one year to the next.

Although it is still more than a month away from the official 2018 COLA announcement, the latest Consumer Price Index (CPI) for August suggests that Social Security benefits could increase by about 1.8% next year, according to Mary Johnson, senior policy analyst at The Senior Citizens League, an advocacy group for older Americans.

COLAs are based on increases in the CPI-W, which measures price inflation for urban workers, from the third quarter of the prior year to the corresponding third quarter of the current year. The Social Security Administration will make its official announcement about next year’s COLA in October.

“With the anticipated higher oil prices over the next few weeks (due to disruptions caused by Hurricanes Harvey and Irma), it could well go higher,” said Ms. Johnson. The anticipated 1.8% increase would be a substantial boost over this year’s paltry 0.3% COLA, which followed no increase in benefits in 2016, and would make it the largest COLA since 2012 when benefits rose by 1.7%.

HOLD HARMLESS PROVISION

Most seniors have their monthly Medicare part B premiums deducted directly from their Social Security benefits. The hold harmless provision prevents the annual increase in their Medicare premiums from exceeding the dollar amount of the increase in their Social Security benefits. It protects about 70% of Medicare enrollees.

The remaining 30% of Medicare enrollees are not protected by the hold harmless provision. They include people who are not collecting Social Security benefits because they are not eligible, such as some public-sector employees, or because they want to delay benefits until they are worth more at an older age. New enrollees in Medicare are also not covered by the hold harmless provision.

In addition, high-income seniors, defined as individuals with a modified adjusted gross income over $85,000 or married couples with joint incomes over $170,000, are not protected by the hold harmless provision. MAGI includes adjusted gross income plus tax-exempt interest. Medicare premiums for 2018 will be based on 2016 tax returns.

IMPACT ON PREMIUMS

Most people who enrolled in Medicare before 2016 paid about $104 per month for Medicare Part B premiums which covers doctors’ fees and an outpatient services. Because there was no Social Security COLA in 2016, there was no increase in their Medicare Part B premiums.

In 2017, Social Security benefits increased 0.3%, boosting the average benefit by about $5 per month and capping Medicare Part B premiums for protected beneficiaries at about $109 per month. In contrast, new enrollees in 2017 pay the new standard Medicare Part B premium of $134 per month.

This year, high-income retirees pay the standard monthly premiums of $134 per month plus a monthly surcharge ranging from $53.50 to $294.60 per person. Surcharges of up to $76 per month also apply to Medicare Part D prescription drug plans.

The 2017 Medicare trustees report projects Medicare Part B premiums will remain at $134 per month next year. An official announcement about Medicare premiums for 2018 will be made this fall.

If the Trustees projections are correct, people who are already paying $134 per month, and many high-income retirees who pay a monthly surcharge, would continue to pay the same Medicare Part B premium next year. However, the highest-income retirees could pay even more due to new income tiers that take effect in 2018.

“Anyone whose Medicare premiums were adjusted in the past due to the hold harmless provision aren’t likely to see any of their COLA increase as Medicare premiums rise to the current $134 per month,” said Ms. Johnson.

Consider this example. For a retiree receiving $2,000 per month in Social Security benefits in 2017, a 1.8% COLA would boost benefits by $36 per month in 2018. If that retiree were paying $109 per month for Medicare part B in 2017, that $36 increase in benefits would fully support a $25 per month hike in Medicare Part B premiums to $134 per month without violating the hold harmless provision. But if someone’s Social Security benefit increased by just $20 per month, their monthly Medicare premium hike for 2018 could not exceed $20.

To be covered by the hold harmless provision in 2018, you must have your Medicare Part B premiums deducted from your Social Security benefits beginning no later than November 2017 and continuing through at least January 2018. In addition, you must not be currently paying a high-income surcharge.

More: Questions about new Social Security rules? Find the answers in my new ebook.

Mary Beth Franklin is a contributing editor to InvestmentNews and a certified financial planner.