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Social Security COLAS and Medicare Part B Premium Increases

Introduction

Social Security Old Age, Survivors and Disability Insurance (OASDI) beneficiaries receive an annual cost-of-living adjustment (COLA) in their January checks. This COLA is based upon changes in the Consumer Price Index (CPI).

Changes in the monthly premium for Medicare Part B are also effective beginning in January of each year. These changes are related to the changes in year-to-year costs of Part B.

Because the amount of the Part B premium is generally subtracted from an individual's Social Security benefit, beneficiaries will receive a smaller increase in their Social Security check than the amount of the COLA.

What determines the Social Security COLA? What determines the Medicare Part B premium? This Fact Sheet discusses the answers.

The Social Security COLA

Since 1974, OASDI benefits have been adjusted annually to reflect changes in the cost-of-living based on the CPI. While the CPI is not perfect, it is the best measure currently available of the costs of goods and services that households experience.

The annual Social Security COLA appears in the January checks. The COLA for a given year always reflects the changes between the two prior years. The COLA received in January 1999, for example, is calculated by comparing the average CPI-W in the third quarter of 1998 to the average CPI-W  in the third quarter of the previous year, 1997. That is, the arithmetic average of the CPI-W for the months of July, August, and September of 1998 would be compared to the average for the same months in 1997. The percentage increase from third quarter 1997 to third quarter 1998 becomes the COLA increase in benefits checks received in 1999.

(Click here to see Impact of the 1.3 Percent COLA on Average Social Security Benefits from December 1998 to January 1999.)

The Medicare Part B Premium

Medicare Part B - which provides health insurance for people over age 65 and for individuals with disabilities - is financed primarily from two sources: (1) premiums paid by beneficiaries, and (2) general revenues. In recent years, beneficiaries' premium payments have been set at approximately one-fourth of Part B program costs and this will continue in 1999. In 1998, the monthly Part B premium was $43.80, the same as it was in 1997. In 1999, the premium will be $45.50. Because Part B costs are projected to rise rapidly, Part B premiums are expected to increase, on average, by more than 9 percent per year between 1998 and 2004. This is partly due to rising health costs and the shift in more medical services from hospital in-patient (Part A) payments to Part B out-patient and doctors' offices.

The Effect of the Part B Premium on Beneficiaries' Social Security Checks

COLAs allow Social Security benefits to keep pace with inflation. However, because beneficiaries' Part B premiums are deducted from their Social Security benefits, the annual increase in the check they receive will be less than the COLA (except in those rare years that the Part B premium does not increase). Even though the increase in the Part B premium may result in a lower check than expected, a provision in the law prohibits Social Security checks from dropping below the dollar amount of the previous year.

Footnotes

  1. Social Security benefits will increase 1.3 percent in 1999 as a result of the annual cost-of-living adjustment.
  2. If the CPI increase is less than one-tenth of one percent, there is no automatic increase for the current year; the COLA for the following year will reflect the increase in the CPI for a two-year period. 
  3. Two CPIs are used to index federal spending: the CPI for Wage Earners and Clerical Workers (CPI-W); and the CPI for all urban consumers (CPI-U). The CPI used to adjust Social Security benefits is the CPI-W, the older of the two. Created in 1919, the CPI-W represents households in which at least half of the income is earned from clerical or wage jobs.
  4. By law, the third quarter (July-September) is the COLA computation quarter.
  5. This estimate is an AARP Public Policy Institute calculation, based on projections in the 1998 Annual Report of the Board of Trustees of the Federal Supplemental Medical Insurance Trust Fund.
  6. While this change extends the solvency of the Medicare Part A trust fund, it also increases beneficiary premiums more than would have occurred had all home health costs remained in Medicare Part A. The premium increases associated with Medicare Part B's home health costs are being phased in between 1998 and 2004.

Written by Laurel Beedon and David Gross, AARP Public Policy Institute
November 1998
©1998 AARP
May be copied only for noncommercial purposes and with attribution; permission required for all other purposes. 
Public Policy Institute, AARP, 601 E Street, N.W., Washington, DC 20049

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