For the first time in 35 years, older Americans will receive no cost-of-living increases (COLA) in their Social Security checks in 2010 according to Congressional Budget Office estimates. The forecast is based on expected low inflation, in contrast to 2009 when the COLA added 5.8 percent to Social Security benefits.
Next year's zero COLA is bad news enough for many retirees living on fixed incomes during a recession. But millions of them also face much higher Medicare Part B premiums next year.
Under an obscure “hold-harmless” provision of federal law, basic Part B premiums in any year cannot rise higher than that year’s COLA. So a zero COLA means that the basic premium (currently $96.40 a month) must stay the same. “The intent of the policy is to protect the amount of the Social Security payment from being reduced by an increase in premium costs,” says Peter Ashkenaz, spokesman for the Centers for Medicare & Medicaid Services (CMS).
The hold-harmless policy gives this protection to the majority of people enrolled in Medicare Part B who also receive Social Security, Railroad Retirement or Civil Service retiree benefits.
But it does not apply to one in four (or about 11 million) beneficiaries who:
- do not have their Part B premiums withheld from their Social Security checks, or
- pay a higher Part B premium based on higher income, or
- are newly enrolled in Part B.
Premium amounts are normally set so that beneficiaries actually pay for only about 25 percent of the costs of Part B benefits, which cover doctors’ visits and other outpatient services. The remainder is paid out of federal funds. Next year, if the premium is frozen for most beneficiaries but costs rise, the shortfall in revenue for that 25 percent falls on the wallets of the one in four beneficiaries not protected by the hold-harmless provision.
"In the absence of a Social Security COLA, unless Part B premiums are increased substantially on those who are not held harmless, the Supplemental Medical Insurance trust fund, which finances Part B, is at risk of exhaustion," according to an analysis by the Congressional Research Service.
For these beneficiaries, the basic Part B premium could rise to $119 a month in 2010, according to Congressional Budget Office projections. And if zero Social Security COLAs continue in later years, as CBO expects, it could rise to $128 by 2012. For people with incomes over $85,000 a year who already pay higher premiums—surcharges of between $38.50 and $211.90 a month in 2009—these amounts would be far more.
The result would be two levels of charges even for basic Part B premiums—the lower amount paid by three-fourths of enrollees, and the higher amount borne by the remaining fourth.
"Congress never anticipated a year when there would not be a Social Security COLA," says John Rother, AARP’s director of policy. "This new situation raises issues of fairness unless Congress makes some changes before the end of the year."
"To address this problem, one action the Congress might consider is to grant a flat Social Security COLA increase each year, during times of low inflation, to offset the impact of rising Medicare costs," Rother adds, "This would avoid the full burden of cost increases falling on a minority of beneficiaries and help keep Part B solvent in the long run."
About 7.5 million Medicare beneficiaries who don’t have their Part B premiums deducted from their Social Security checks are those whose premiums are paid for by their state Medicaid program. These low-income people are not affected—they still won’t pay the premiums themselves. But the states would have to pick up the tab for the higher premiums. This could affect the number of people covered by Medicaid if state governments, already strapped by falling revenue, cut back on services, consumer advocates say.
Everybody else who pays Part B premiums directly to Medicare by check will be affected by the higher amounts. These include people who, though enrolled in Medicare, have deferred collecting their Social Security benefits.
Also affected are many people newly enrolled in Part B who therefore did not have premiums deducted from their retirement checks the previous year. The hold-harmless calculation is made in November each year, CMS says. So anyone joining Part B in 2010 would have to pay the higher Part B premiums until November 2010 when they would become eligible for hold-harmless protection.
The hold-harmless provision applies only to Part B premiums and not to premiums for Part D drug coverage, which are also often withheld from enrollees’ Social Security checks. “If Part D premiums rise in 2010, the result would be that beneficiaries with Medicare drug coverage will still receive less money in their Social Security checks even if their Part B premiums don’t increase,” says Rother.
Patricia Barry is a senior editor at the AARP Bulletin and Bulletin Today.