Automatic cost-of-living adjustments are supposed to help Social Security benefits keep pace with inflation, but years of low inflation and rising Medicare costs are threatening the adequacy of a key component of seniors' income.
Over the past eight years, Social Security COLAs have averaged just 1.2% per year while Medicare Part B premiums have increased on average more than 10% per year during the same period, according to a new report from The Senior Citizens League, a nonpartisan advocacy group. In most cases, premiums for Medicare Part B, which pays for doctors' visits and outpatient services, are deducted directly from Social Security payments.
About half of all Medicare beneficiaries report that they spend up to one-third of their Social Security income on health care costs, and another 23% report spending up to 50% of their Social Security benefits on health care, according to an advance copy of the TSCL report, which is scheduled to be released Wednesday.
The report takes a closer look at the Social Security "hold harmless" provision, which was first established in 1988. The rule says the annual increase in Medicare Part B premiums cannot exceed the annual increase in Social Security benefits, to protect most seniors from a net decline in Social Security benefits from year to year. In most years, even a modest COLA increase in Social Security benefits is sufficient to accommodate an annual increase in Medicare Part B premiums. In fact, the hold harmless rule wasn't tested for more than 20 years.
But all that changed in 2010. Following the Great Recession, inflation turned negative. By law, Social Security benefits can't decline, but they can be frozen. In 2010, there was no COLA increase in Social Security benefits and consequently, most retirees did not see an increase in their Medicare Part B premiums.
But the hold harmless rule doesn't protect everybody, and the remaining 30% of Medicare beneficiaries must shoulder a bigger increase in the years when the hold harmless rule comes into play. People who are enrolled in Medicare but not collecting Social Security — including those who choose to delay their Social Security benefits until they are worth more at an older age — are not protected by the hold harmless provision. Neither are newly enrolled Medicare beneficiaries and high-income retirees, defined as individuals with modified adjusted gross income topping $85,000 and married couples whose joint income exceeds $170,000.
"Since 2010, inflation has been at unprecedented lows, but Medicare Part B premiums have increased substantially," the report said. "The majority of Medicare recipients have seen little or no growth in their Social Security benefits after deduction of the Part B premium for several years in a row."
No COLAS were paid on Social Security benefits in 2010, 2011 and 2016. In 2017, the COLA was just 0.3%, increasing average Social Security benefits by about $5 per month. The hold harmless provision was triggered in each of those four years.
This year, Social Security benefits increased by 2%, boosting average benefits by about $27 per month. But Medicare Part B premiums increased by $25 per month in 2018, virtually wiping out any increase in benefits.
"With Medicare Part B premiums expected to grow two to three times faster than the rate of Social Security benefits, there's widespread concern about the ability of Social Security benefits to keep pace with rising Medicare costs and the adequacy of benefits," the report said.
In 2017, the Medicare trustees forecast that Medicare Part B premiums would increase about 5% per year over the next decade. The Centers for Medicare and Medicaid Services recently estimated that health care spending in general would increase even faster, growing an average of 7.4% per year over the next 10 years. Meanwhile, the annual Social Security COLA is expected to be about 2.4%, according to the Congressional Budget Office.
"Cost-of-living adjustments would need to double their current average rate of growth and Medicare Part B increases would need to slow by half the historic rate of growth since 2000 to ensure the adequacy of Social Security benefits for the majority of beneficiaries," the report said. "If COLAs continue to average 1.2% as they have since 2010, the Social Security hold harmless provision would continue to be triggered with great frequency in coming years."
The most important thing that people nearing retirement should consider doing is to delay Social Security benefits until age 70, the report said. Benefits grow by 8% per year for every year they are postponed beyond full retirement age up to age 70.
"The higher your benefit and COLA, the easier it will be to cover Medicare Part B and other health care costs in retirement," said the report's author, Mary Johnson, a Social Security and Medicare policy analyst for The Senior Citizens League.