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About 70% of Social Security recipients have Medicare premiums paid via withholding from Social Security
Benefits. In 2015, the inflation index used to calculate benefits showed no inflation so there was no increase in
Social Security benefits from cost of living adjustments.

Increasing Medicare charges would have resulted in a reduced benefit, so the hold harmless provision of the
Social Security Act precluded any increase in Medicare premiums. Excluded from this protection are taxpayers
with Modified Adjusted Gross Income above $85,000 ($170,000 for married taxpayers), and federal and state
government employees not collecting Social Security.

Background

  • Part A Medicare benefits (hospitalization) have always been funded by a 2.9% wage tax split equally
    between the employer and employee. Premiums are not charged to the participants.
    The wages subject to this tax were initially capped at the FICA limit. The cap was eliminated in 1993, so
    the tax now covers all wages and self-employment income.
  • When Medicare was enacted in 1965, it provided for insurance premiums to be charged for Part B
    benefits (doctors). Initially the premiums were set to cover 50% of the cost of the program. Starting in
    the early 1980s, Congress voted to reduce the premiums to 25% of the program’s per capita costs. The
    reduction was made permanent in 1997.
  • For the past 35 years there have always been premium billings to cover some of the program’s costs,
    with the balance being paid from general tax revenue. Starting in 2007, a surcharge was levied on high
    income participants.

  • Social Security benefits are inflation indexed using CPI-W, the consumer price index for Urban Wage
    Earners and Clerical Workers. Over the past 35 years CPI-W has consistently been below increases in
    Medicare Part B premiums.

    Medicare Part B Premiums have historically increased at a faster rate than the medical care component
    of CPI-W. This is due to increased utilization of medical services.

    (No Social Security Cola causes Medicare flap, Center for Retirement Research at Boston College,
    August 2015, Number 15-14, pages 3-4).

  • The 2013 medical care component of CPI-W was half the medical care component of the CPI for the
    elderly (CPI-E).

    CPI-W
    6.2%

    CPI-E
    11.4%

    (No Social Security Cola causes Medicare flap, Center for Retirement Research at Boston College,
    August 2015, Number 15-14, page 4)

Analysis

  • If the purpose of indexing Social Security benefits was to preserve the purchasing power of retirees, the
    wrong inflation index is used. Younger working people have far lower medical costs than retirees.
  • Medicare Part B premium increases are hugely affected by utilization. This is not captured by inflation
    figures.
  • When CPI-W inflation returns in future years, individuals who benefited from the hold harmless
    provision of the Social Security Act will have premium catch-ups. This happened in 2012 after the
    CPI-W adjustments were zero in 2010 and 2011. The hold harmless provision in the Social Security Act
    only acts to temporarily limit Medicare premium increases.
  • There is pressure on the government to increase Medicare Premiums.
    70% of the participants pay 25% of the per capita cost. The remaining 30% pay between 35% and 80%
    of the per capital cost. Since the income profile of the 30% of participants who pay surcharges is skewed
    towards the lower end of the income scales, it would be reasonable to estimate that on average they pay
    40% of the per capital cost.
  • Participants * Cost % after Surcharges = Contribution to Total Costs
    70% * 30% = 17.5%
    30% * 40% = 12%
    Total = 29.5%

    Premium charges only cover about 30% of the program’s costs.

    If surcharges were confined to the upper income 30% of participants, you would see surcharges at 275%
    to make premiums equal per capital costs.

    Participants * Cost % after Surcharges = Contribution to Total Costs
    70% * 30% = 17.5%
    30% * 275% = 82.5%
    Total = 100%

    How’s that for affordability?

    Conclusions

    • When doing planning for retirement, count on increases in Medicare premiums.
    • The government has a vested interest in having Medicare premium charges increase at a faster rate than
      the increase in Social Security benefits. The trend will be to have Medicare premiums take a larger and
      larger percentage of Social Security benefits.
    • The government has a funding problem with Medicare Part B that will not be solved by loading
      premium increases on high income taxpayers. There aren’t enough of them to make up for the 70% of
      participants who don’t pay surcharges.
    • Don’t count on the Social Security COLA to maintain your purchasing power.