Most of the Medicare-eligible people who receive Social Security have their Medicare Part B premiums automatically deducted from their benefit checks. In recent years, however, Medicare Part B premiums have grown far more rapidly than beneficiaries’ annual Cost-Of-Living Adjustments (COLAs), taking a substantial portion, or sometimes all, of the annual increase. Including the 3.3% COLA that becomes effective January 1, 2007, over the past five years COLAs have increased just 13.6% while Medicare Part B premiums have grown 60% over the same period of time.(1)

A little-known provision of law, that may be one the government’s best-kept secrets, protects the Social Security checks of individuals from going down when Medicare Part B premiums increase. Specifically, the law says that if the amount of the Part B premium increase is greater than the dollar amount of an individual’s annual Social Security COLA, the premium owed by that person would be reduced to the amount required to assure no reduction in the Social Security “cash payment” (net benefit after deduction of the Part B premium) in the following year.(2)

In recent years, for the first time, Medicare premiums have grown large enough to completely consume the amount of COLA received by people with the lowest benefits. This study found that when this happens, over time, the net cash benefit — the amount a person receives after deduction for the Part B premium — ceases to grow, but remains “fixed,” despite a small annual COLA.

In addition, the fiscal burden on Medicare grows as well. Not only will the entire COLA of beneficiaries be required to cover the increase in Part B premiums, but, by law, the government will need to provide further adjustments to the amount of Part B premiums of affected individuals in order to avoid a reduction in their net Social Security benefit. As Medicare premiums grow larger over time, more and more seniors and the disabled will see little, and then no, increase at all in their net benefit in coming years. The Medicare program deficit will grow as the government absorbs the adjusted Part B premium amounts.

This study found that the point at which this occurs is uncomfortably close. Based on Social Security Administration statistics through June 2006, an estimated 2,325,000 beneficiaries, more than 4% of Medicare-eligible Social Security recipients, have already started to feel the effects. Even more disturbing, however, some 40% of today’s retirees and disabled, about 20 million people(3) whose net monthly benefits are $922.50 or lower in 2006, could see their benefit checks stop increasing within the next six to eleven years due to Part B premium costs.

When the net benefit stops growing, it means seniors and the disabled face spending the rest of their years struggling to figure out where the extra money will come from to cover all other rising costs such as supplemental health insurance and Part D drug costs, energy bills, home repairs — virtually everything else. While this is a highly serious situation, it would be greatly exacerbated should beneficiaries lose this valuable protection of their net benefits. The fiscal value that this law provides will grow increasingly greater over time and will become extremely critical for Social Security recipients.

Today the problem is starting to affect many individuals who can least afford it — those with a very low monthly benefit of $322 or lower in 2006, after the deduction for the Part B premium. The Medicare Part B premium increase completely offset their COLAs in 2004 and exceeded their COLAs altogether in 2005.

Compounding the problem, this special provision of law does not extend to Part D premiums. Any increases in drug plan premiums that are automatically deducted from Social Security benefits, and which exceed the amount of COLA, will reduce the individual’s net Social Security benefit the following year.

Conclusion:
Unless Congress acts to cut the rate of growth of Medicare Part B premiums, and improve the adequacy of the COLA, the annual COLA simply won’t be enough to cover Part B increases for tens of millions of seniors and the disabled in the future. Cutting the rate of growth of Medicare Part B premiums is essential to maintain program sustainability and affordability for both beneficiaries and taxpayers now and for the long haul. A more adequate COLA is important to help maintain the spending power of net Social Security benefits longer as beneficiaries become older and more likely to have health conditions that require a greater portion of their incomes.

Sources:

(1)2006 Social Security and Medicare Trustees Reports, May 1, 2006. “Medicare Premiums and Deductibles for 2007,” Centers for Medicare and Medicaid Services, September 13, 2006. “Social Security Announces 3.3% Benefit Increase for 2007,” Social Security Administration, October 18, 2006.
(2)SEC 1839 (f) Social Security Act.
(3)OASDI Monthly Statistics, September 2006, Social Security Administration, November 13, 2006.

The following series of tables illustrate the problem under both actual and projected economic conditions.

Table 1.
Net Social Security Checks Will Stop Increasing As Medicare Premiums Rise

An estimated 2,325,000 million, more than 4% of all Social Security beneficiaries with the lowest benefits, are already affected by the Medicare Part B premium offsetting or exceeding their COLA.

*Year starting benefits.
Assumptions: COLA estimates, Congressional Budget Office, August 2006.  Medicare Part B premium growth based on past five-year average growth rate of 11.6%.

Table 2.
Net Social Security Checks Will Stop Increasing As Medicare Premiums Rise

An estimated 9,988,000 million beneficiaries with monthly net Social Security benefits of $587.50 or below, about 20% of all Social Security recipients in 2006, could see their benefit checks stop growing within six years.

Table 3.
Net Social Security Checks Will Stop Increasing As Medicare Premiums Rise

An estimated 20 million beneficiaries, with monthly net Social Security benefits of $922.50 or below in 2006, about 40% of all Social Security recipients in 2006, could see their benefit checks stop growing within ten to eleven years.

Who’s Affected?
• An estimated 20 million beneficiaries, with monthly net Social Security benefits of $922.50 or below in 2006, about 40% of all Social Security recipients in 2006, could see their benefit checks stop growing within ten to eleven years.
• Of the 20 million, nearly half, 9,988,000 million, with monthly net Social Security benefits of $587.50 or below, about 20% of all Social Security recipiepts in 2006, could see their benefit checks stop growing within six years.
• Of the 20 million, an estimated 2,325,000 million, more than 4% of all Social Security beneficiaries with the lowest benefits today, are already affected by the problem.

December 2006