On Retirement

Social Security cost-of-living adjustment expected to be lowest ever

Small increase will create a Medicare nightmare as premium hikes will vary

Oct 11, 2016 @ 4:56 pm

By Mary Beth Franklin

Advisers, get your aspirin ready. When the Social Security cost-of-living-adjustment for 2017 is officially announced next week, it is expected to be 0.3% — the lowest annual increase on record.

After no annual cost of living adjustment this year, Social Security benefits are expected to increase by 0.3% in 2017, according to a new forecast by The Senior Citizens League (TSCL).

“And there's a chance that lower gas prices will drag the COLA down even further, to 0.2%,” said Mary Johnson, a Social Security policy analyst and researcher for TSCL. Either way, the 2017 COLA is expected to raise Social Security benefits by only a few dollars, and any increase will be completely offset by stiff increases in the Medicare Part B premium for most people 65 and over.

(More: My client's Medicare coverage has been canceled, now what?)

But wait. It gets worse.

Because of the convoluted “hold harmless” rule that protects most retirees against a net decline in Social Security benefits, the amount of the Medicare Part B premium increase for 2017 cannot exceed the dollar amount of Social Security benefit increase for next year. That means the increase in Medicare Part B premiums could vary widely depending on the amount of a person's Social Security benefit.

About 39 million people, representing two-thirds of Social Security beneficiaries, have Medicare Part B premiums deducted directly from their Social Security benefits. Medicare part B cover doctors' visits and outpatient services.

Most of those beneficiaries are protected by the “hold harmless” provision, provided their modified adjusted gross income (MAGI) for the last available tax return is below $85,000 if they are single or $170,000 if they are married. Medicare premiums in 2017 will be based on 2015 federal tax returns.

For example, consider a Medicare Part B enrollee who currently pays $104.90 per month for Medicare. If this individual were receiving a Social Security benefit of $1,500 per month, then a 0.3% COLA would increase the Medicare premium by $4.50 per month to $109.40 in 2017. But if that individual received a Social Security benefit of $2,500 per month, then that enrollee's Medicare premium would increase by $7.50 per to $112.40 per month in 2017.

People who enrolled in Medicare in 2016 pay a higher base amount of $121.80 per month. Their Medicare premium for 2017 could also increase by the amount of their Social Security COLA.

(More: How Social Security benefits are calculated)

Higher-income retirees, as well as people who are enrolled in Medicare but not collecting Social Security benefits, will pay even higher Medicare Part B premiums next year. So will people who enroll in Medicare for the first time in 2017.

“Beneficiaries who do not qualify for protection under the hold-harmless provision could face large Medicare premium increases in 2017,” according to a Congressional Research Service report on Medicare Part B Premiums published in August. “If there were a 0.2% Social Security COLA in 2017, the Medicare Trustees estimate that the standard premiums of those not held harmless would increase to $149 per month with those paying the high-income premiums potentially facing monthly premiums ranging from $204.40 to $467.20 per month.”

If the TSCL's forecast of a 0.3% COLA proves correct, those Medicare Part B premiums for 2017 would be slightly higher.

Social Security cost-of-living adjustments have flatlined at unprecedented lows over the past seven years, averaging just 1.2% a year. That's less than half the 3% that COLAs averaged from 2000 to 2009.

“The low growth in Social Security benefits since 2009 has a significant impact on overall retirement income of anyone who has been retired since that year,” Ms. Johnson said. “For people retired over the past seven years, monthly benefits in 2016 are today 13% lower than if inflation had been the more typical 3% per year,” she explained. “In dollar amounts, that's $150 per month lower for someone with average benefits.”

A major reason that the COLA is so low is the consumer price index that the government uses to calculate the increase. Under current law, the COLA is tied to the increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). That index surveys the spending patterns of younger working adults and does not include the market basket of goods and services that is more typical of people age 62 and over. The CPI-W gives greater weight to goods and services that younger workers spend more on, like gasoline prices and electronics, which have dramatically dropped in price over the past two years.

(More: These retirees lost most when Congress changed Social Security benefits)

Several bills introduced on Capitol Hill this year would require that Social Security cost-of-living adjustments be tied to an index that more closely tracks spending of the elderly known as the CPI-E, which would result in more generous annual increases. The CPI-E gives more weight to housing and medical expenses, two categories that have experienced bigger price jumps over the past two years and are the two biggest spending categories for older consumers.

(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.

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