2004 COLA 2.1%, Medicare Premium Jumps 13.5%

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2004 COLA 2.1%, Medicare Premium Jumps 13.5%

For the second year in a row, Social Security recipients will receive a near-record low Cost-of-Living Adjustment (COLA) while Medicare premiums continue to soar. COLA recipients will see their benefits grow by a mere 2.1% in 2004, following a 1.4 % increase in 2003. The 2.1% COLA, effective January 1st is one of the lowest in the history of the program—in only three other years has the COLA been lower.

On the other hand, the Medicare premiums will jump $7.90 per month, from $58.70 to $66.60, an increase of 13.5%. In the past 10 years Medicare premiums have grown by 69%, with 42% of that occurring in just the past four. In recent years Congress has repeatedly passed legislation that increases reimbursements to health care providers, while some anti-fraud measures were relaxed, resulting in higher costs to both beneficiaries and the government. Beneficiaries pay about 25% of the cost of Part B premiums, with the federal government covering the remaining 75%.

COLAs have been low in recent years due in part to changes in how the government calculates the Consumer Price Index (CPI). The CPI is used to calculate COLAs, and virtually all the changes to the CPI tend to slow the rate of growth of the index, resulting in lower COLAs. In addition, the COLA under-calculates the actual cost-of-living increase experienced by older Americans as a group because it was specifically designed to measure the cost of living experienced by younger, urban working families.

In 1996, a commission led by economist Michael Boskin estimated that the CPI overstated increases in the cost of living by about 1.1 percentage points per year. Since then, the Bureau of Labor Statistics has made a number of changes that have a cumulative impact of lowering the CPI by about one full percentage point. An ongoing study for TSCL by Advisor editor Mary Johnson has found that a person retiring with an average benefit of $903 in 2003 will receive about $7,113 less in benefits over the next 10 years than they would have using pre-1996 methodology.

Source: Social Security Administration, October 16, 2003. “Measurement Error In The Consumer Price Index,” David E. Lebow and Jeremy B. Rudd, Board of Governors of the Federal Reserve System, December 7, 2001. 2003 Study of Impact of 1% Change, Mary Johnson, October 16, 2003. “Social Security Checks Get An Increase,” Leigh Strope, The Associated Press, October 16, 2003.

December 2003