This is the time of year Social Security recipients find out how much their retirement benefits will increase (or not increase), and also how much next year’s Medicare Part B premiums will increase.
Based on recent experience, Social Security benefits haven’t been keeping up with inflation, and any increase we do get has been washed away by increases in Medicare premiums. So how are these increases (or lack thereof) decided? Here’s a look into the wild world of Social Security and Medicare formulas.
Making Sense of Social Security and Medicare Increases for 2017
A really small Social Security increase for 2017
It’s official: For 2017, Social Security benefits will increase by just 0.3%. To put that in perspective, if your Social Security retirement benefit was $1,500 a month this year, your increase for 2017 will be $4.50 a month. This meager increase follows the zero increase for 2016, and relatively small increases for 2015 and 2014. Over the last five years, the benefit increases have averaged barely 1%. In the words of the immortal Wordsworth: What gives?
How Social Security COLAs are determined
Social Security benefits are automatically adjusted for inflation (Cost of Living Adjustments or COLAs) each year. Inflation for 2016 will end up being about 1.4% for the year. So why are we not getting a 1.4% increase in Social Security benefits?
A main reason is that Social Security COLAs are not based on the widely used measure of inflation, Consumer Price Index (CPI), but rather on a special index called the CPI-W. This is often criticized because CPI-W is not very representative of what retirees purchase. For instance, the cost of medical care was up over five percent in 2015, but CPI-W didn’t factor that in much, because medical care represents a low percentage of spending for the average consumer, while it is a higher portion for retirees.
Medicare Part B premium increases for 2017
Medicare Part B premiums are not yet set in stone for 2017, but big increases are projected (up to 20%!) unless Congress intervenes. If this sounds like “deja-vu all over again” it’s because this was the exact same situation we were in last year, when Congress had to provide a loan to the Medicare trust fund in order to avoid a 50% spike in Medicare Part B premiums.
How Medicare premium increases are determined
The formulas for Medicare premium increases are even more complex than the Social Security benefit formulas, and they don’t apply to all Medicare recipients equally, thanks to the “hold-harmless” provision.
Under the hold-harmless provision, if the Medicare Part B premium rises by more than the dollar amount of the Social Security cost of living increase (COLA), the beneficiary will be spared the full premium increase. On the other hand, their entire COLA will be eaten up by Medicare premiums, so that their Social Security checks will remain unchanged for 2017. So much for the 0.3%!
Unfortunately, that’s not the end of it. Hold-harmless only applies to Medicare beneficiaries who have their Medicare premiums deducted from their Social Security checks, and who are not subject to the income-related surcharges. That is about 70% of all beneficiaries. But what about the other 30% of beneficiaries? Unfortunately, they will face the brunt of the increase, unless Congress again comes to the rescue.
The 30% of Medicare recipients that are subject to the increases include:
- Enrolled in Medicare for the first time in 2017
- Not having Medicare premiums deducted from their Social Security check
- Those that are delaying benefits
- High income taxpayers subject to the income-related surcharge
If you are delaying Social Security, this may lead you to wonder if you should apply before the end of 2016 in order to be held harmless. The answer is no- over a lifetime, the delayed credits you will receive are worth far more than one or two years of Medicare premium savings.
Making sense of Social Security and Medicare
If you find the Social Security and Medicare formulas hard to understand, you’re not alone. The Social Security Administration does offer some helpful resources: you can request a benefit estimate or use one of the benefit calculators available on the Social Security Administration website.
However, understanding the benefit formulas is only the beginning. Making decisions about Social Security and Medicare benefits requires a clear view of how these benefits fit into your particular retirement picture. That’s where your financial advisors come in.
At Blankinship & Foster, we specialize in helping retirees, near-retirees and women in transition make smart decisions not only about benefits like Social Security and Medicare, but across the whole spectrum of your finances. Contact us today to discuss how we can help you.