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Retirement Planning > Social Security

Confirmed: No Inflation Means No Social Security COLA; Medicare Premiums to Surge for Some

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The release Thursday of the Consumer Price Index figures for September 2015 confirmed that all Social Security beneficiaries — old age and survivors, disabled workers and SSI recipients — will not see a COLA increase in benefits next year for the third time since 2009. Under law, that will also mean that Social Security beneficiaries with higher incomes will see increases in their premiums for Medicare Part B, which pays for physicians’ bills, outpatient care, durable medical devices and other goods and services.

The government typically announces the coming year’s Medicare premiums in the beginning of October, though they have not done so yet. In announcing that Part B premiums would remain stable last Oct. 9, the Secretary of Health and Human Services, Sylvia Burwell, said, “The stabilization of Part B premiums is another example of how we are containing health care costs to provide a more sustainable and affordable health delivery.”

In the chart below, are Social Security COLAs since 1975; they are announced in Q4 for the following year with changes seen in checks beginning in January. You can see the double-digit increase in Social Security benefits in 1980-81 when inflation was spiraling upward.Click to enlarge

The Bureau of Labor Statistics reported Thursday morning that the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W, the inflation index on which Social Security COLAs are based, declined 0.6% from September 2014 and 0.3% in September.

As the Social Security Administration explains it (see chart below), using actual index numbers (based on 1982-1984 prices=100) not inflation percentages, “the average CPI-W for the third quarter of 2015 is 233.278. Because there is no increase in the CPI-W from the third quarter of 2014 through the third quarter of 2015, there is no COLA for December 2015.”

The SSA also released a fact sheet summarizing the changes in Social Security for 2016.
Pressure is increasing for action in Washington, in the words of an AARP letter to all members of Congress, “to pass a fix for Medicare beneficiaries who face much higher cost increases” because of the lack of a COLA next year.
Specifically, the Oct. 14 letter calls on Congress to “reduce the impact of the sudden, sharp increases in the Part B premiums and deductible as soon as possible.  Ideally, all Medicare beneficiaries should be held-harmless in the face of no Social Security COLA adjustment.”

Click to enlargeThe “held-harmless” phrase refers to the income thresholds that determine premiums for Part B of Medicare. In a paper from Boston College’s Center for Retirement Research (CRR), Alicia Munnell and Anqi Chen wrote earlier this year that by law, the cost of higher Medicare Part B premiums cannot be passed on to most beneficiaries — about 70% of whom are considered “held harmless” on premiums — when they do not get a raise in their overall Social Security benefits. The remaining 30% of beneficiaries thus must make up for the higher costs of the Medicare system by paying higher premiums based on their income.  

Ironically, Oct. 15 is the beginning of the Medicare Open Enrollment period when Medicare members can choose their Medicare Advantage of Prescription Drug Plan for next year; the open enrollment period ends Dec. 7.

But Is It Fair?

William Byrnes, associate dean for special projects at the Texas A&M University School of Law, characterizes the lack of a COLA and the increase in Part B premiums more bluntly. “It’s the Federal government’s way of mitigating expenditures on the backs of seniors” who have contributed to the Social Security system for decades.

“They all paid in, and it’s not right” that the government is using higher Medicare premiums, “mitigating a cost that in theory” a Social Security beneficiary “has already paid for” during her working years. “In any other” retirement system, if a person paid in for decades, “you’d be covered.”

(See Alicia Munnell: 3 Workable Ways to Save U.S. Retirement System)

Moreover, Byrnes says that the measure of inflation is flawed, particularly for older people, and uses his own mother as an example. “She’s 86, so she doesn’t drive any more,” so she doesn’t directly benefit from the decline in gasoline prices. Instead, the cost of her taxi rides to the supermarket has increased, and once she does buy her groceries, “it’s not like the cost of an orange has gone down,” even though in theory lower energy prices means lower transportation costs to deliver that orange to the supermarket should result in lower prices.

Byrnes, who with colleague Robert Bloink writes the weekly Law Professor blog, which often focuses on retirement income planning, for ThinkAdvisor, argues that any inflation measure should be regionally based. “The orange still costs a buck,” and despite no inflation as measured by CPI-W, “the taxi costs $4.50.” While “in some town in America” inflation might be down, the CPI-W data “doesn’t work across our country.”

It’s not that the whole Social Security “system went bust,” but when considering the increase in Part B premiums, for example, and the fact that those premiums are deducted from monthly benefits before checks are cut for recipients, thus reducing their disposable income, Byrnes says for recipients “it’s death by a thousand cuts.”

In its letter, AARP says that “16.5 million Americans face sharp premium increases” and that “all Medicare beneficiaries will see their Part B deductible increase 52%…from $147 to $223.”

(See How to Enroll in — and Pay for — Medicare)

According to the Social Security Administration, as of year-end 2014 there were 59 million total Social Security beneficiaries, There were only 31 million total recipients in 1975, when the first automatic COLA was applied following passage by Congress of the 1972 Social Security Amendments as a rider–in another irony–to a debt-extension bill.

(Click on table below to view the growth in the number of Social Security beneficiaries from 1970 to 2014.)

Click to enlarge

Who Faces Higher Premiums Next Year?

Beginning in 2007, Part B premiums became based on the income of the beneficiary. In their CRR paper, Munnell and Chen wrote that under current law, Part B premiums for other beneficiaries “must be raised enough to offset premiums foregone due to the hold-harmless provi­sion.” The estimated monthly premium in 2016 for these other beneficiaries will be $159.30, up 52% from 2015’s $104.90 monthly premium. Higher income participants, they write, would then pay “mul­tiples of $159.30 depending on their income level.”

Below is what the premiums were in 2015 for higher-income Medicare enrollees:

Income-Related Part B Premiums for 2015

 Income-Related Part B Premiums for 2015

And here are the estimated premiums for 2016 for those higher-income Medicare members:

Likely Income Thresholds for Part B Premiums for 2016

 Likely Income Thresholds for Part B Premiums for 2016

(Source: Centers for Medicare and Medicaid Services)

These higher premiums for some Medicare recipients, the authors say, highlights the broader “complicated interaction between Medicare premiums, which are generally deducted automatically from Social Security benefits, and the net benefit – the money available for non-health care expenditures.” Since Social Security COLAs do not “fully reflect the increase in health care costs faced by the elderly, the net Social Security benefit does not keep pace with inflation.”

Finally, speaking of inflation, below is inflation measured by CPI-W over the past ten years, through September 2015.

Click to enlarge


– Related on ThinkAdvisor: No Social Security COLA in 2016: Higher Medicare Premiums for Your Clients


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