Imagine opening your Social Security check next January to discover that your benefits are lower than what you received this year - a good bit lower - and that your Medicare premiums have taken a huge jump.  Some of you face such reductions of your Social Security benefits as early as 2007 due to two recent changes.  Those reductions may come as a total shock, because the federal government has released virtually no information about them - at least, not yet. 

Most beneficiaries have their Medicare Part B (doctors’ and hospital outpatient) premiums automatically deducted from their Social Security check.  But you probably didn’t know that a provision of law protects most Social Security recipients from reduction in benefits when the annual increase in Medicare Part B premium exceeds the Cost-of-Living Adjustment (COLA) dollar amount that a person receives.  The law adjusts the premium increase so that benefits don’t get cut when the Medicare Part B premium increase is higher than the COLA.  That provision of law will have implications for two groups of beneficiaries starting in 2007; enrollees of Medicare Part D prescription drug plans who have their drug plan premiums automatically deducted from their Social Security, and beneficiaries with annual incomes higher than $80,000.

How enrollees of Medicare Part D drug plans could be affected:
Congress didn’t extend this same protection to Medicare Part D drug premiums.  If you have new Medicare Part D premiums deducted from your Social Security, any increase in your drug premium starting January 1, 2007 that’s greater than the amount of your COLA increase will come straight out of your Social Security benefit.  You could wind up with a lower Social Security check next year than what you receive now. 

How beneficiaries with annual incomes higher than $80,000 will be affected:
In 2007 for the first time since Medicare began, the government will determine Medicare Part B premium based on income.  The government calls it "income relating," or income based premiums.  It’s also referred to as "means testing." 

Seniors with annual incomes of $80,000 and more will be affected.  These individuals will pay significantly higher premiums than other seniors, and the higher premiums will come right out of Social Security benefits.  The special protection that currently prevents Social Security benefits from reduction will not apply to persons affected by means testing.

According to my calculations, this change will have the greatest impact on beneficiaries whose Social Security benefits are average or below average, but whose other income subjects them to the highest Medicare Part B premiums.  The government estimates that beneficiaries with incomes of less than $80,000 will pay a monthly premium of at least $98.40.  Beneficiaries with incomes $80,000 and higher will likely pay a monthly Part B premium that ranges from $111.50 to as much as $170.60.  Retirees having incomes higher than $80,000, but with only average Social Security benefits (about $1,002 in 2006), may see reductions in their Social Security starting in January of next year to cover higher Medicare Part B premiums. 

If Medicare premiums continue to grow at the current annual pace of about 12%, the average rate of growth since 2002, the impact on the Social Security benefits of persons affected by means testing is enormous.  Those persons affected will eventually need their entire Social Security check just to cover the Medicare Part B premium.

TSCL is highly concerned that if Medicare premiums become too high beneficiaries may be driven right out of the program.  If this happens, that’s likely to leave the oldest and sickest behind, thus driving up program costs and future premiums for everyone, no matter what their income.  In fact, the Centers For Medicare and Medicaid Services estimates that some 50,000 seniors may drop their enrollment in Medicare Part B in 2007 alone.

Currently, the impact of these new Medicare changes is not widely known nor understood.  TSCL is one of the only nonpartisan sources of information for beneficiaries and their Members of Congress to learn about the impact of these changes.  Please help us spread the word by sharing this article with your friends and elected lawmakers.

Sources:  SEC 1839 (f) of the Social Security Act.  "Rising Medicare Premiums Undermine The Social Security COLA," Economic Policy Brief, Representative Pete Stark (CA), Joint Economic Committee, July 2004.  "Wealthier Seniors Will Pay Higher Premiums For Medicare," Diane Lade, South Florida Sun-Sentinel, July 25, 2006.  2006 Medicare Trustees Report, May 1, 2006.

October 2006