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Retirement Planning > Social Security

How Medicare Premium Hikes, Small Social Security COLAs Squeeze Retirees

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A piggy bank in a doctor's hand ( Photo: Shutterstock)

The 2021 cost-of-living adjustment for Social Security benefits of 1.3% announced recently has been criticized by many advocacy groups as not keeping up with health care expenses.

In the table below, the Senior Citizens League, an advocacy group for retirees, illustrates how the increased costs in Medicare Part B eats away at the COLA, further slamming senior benefits. For higher income beneficiaries — those with modified adjusted gross incomes of more than $87,000, or $174,000 for a couple — this can take even more of a bite.

“Medicare premiums are increasing three to four times faster than the annual cost of living adjustments,” Mary Johnson, Social Security and Medicare policy analyst for The Senior Citizens League, told ThinkAdvisor. “This is going to become an ongoing recurrent issue when the premium is going to increase more than COLAs.

“What we’re saying is this is a signal that the COLA is not doing what it was intended for, which is to protect the buying power of benefits. When other costs are getting to the point where people cannot cover their Medicare Part B premium, that means the benefit itself is reaching inadequate levels.“

Medicare Part B helps pay for doctor visits, diagnostic tests and other outpatient services.

Although the Medicare Part B premium increase for 2021 hasn’t been announced yet, it was estimated by the Trustee Fund to be $8.70, which would be a 6% increase. A Social Security recipient earning the average monthly benefit of $1,503 will receive a 2021 COLA of $19.54.

A “hold harmless” provision protects the vast majority of beneficiaries from net reductions to their Social Security benefits when Medicare Part B premiums increase more than the dollar amount of their Social Security checks.

However, the bad news for many advisory clients is that roughly 5% of Medicare beneficiaries are not protected — higher income beneficiaries, i.e., those who have a modified adjusted gross income of more than $87,000 (individual) or $174,000 (joint filers). They are required to pay income-related surcharges on their Part B premiums, along with the full amount of any increase in Part B premiums.

But there’s hope.

“The Medicare Trustees projected last spring an $8.70 monthly Part B premium increase,” said Walter Gottlieb, of the National Committee to Preserve Social Security and Medicare. “But Congress passed and the president signed legislation this fall that would limit any 2021 Medicare part B increase to 25% of what it would otherwise have been. So until Medicare announces the actual Part B increase (in November), we won’t know the exact dollar impact on the COLA.”

That said, clients will need need help traversing this treacherous landscape. The Senior Citizens League’s table shows how COLAs haven’t kept up with Medicare Part B premiums over the last 10 years. And this year, premiums are projected higher due to the impact of COVID-19.

The group cites Congressional Budget Office forecasts that, due to higher spending, Medicare outlays could grow 12% this year, double the 6% increase estimated by the Medicare Trustees in April.

This would mean a premium increase of $50 a month for some beneficiaries, according to AARP. But the good news, the group says, citing a spokesman for House Speaker Nancy Pelosi, is that Congress gave Medicare a cash infusion in its latest budget bill, so a Part B premium increase should only be about $4 a month.

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