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Unintended Consequences of No COLA for Retirees

Author: Matthew Davis

Social Security recipients recently got the bad news from the government that there will be no cost-of-living adjustment (COLA) increase for 2016. (For more, see Is the Cost-of-Living (COLA) Adjustment Mandatory?) That means millions of Social Security recipients, disabled veterans and federal retirees will have to find a way to pay for increasing food and other costs on the same budget they had last year. For some, medical costs will also rise dramatically, as Medicare Part B premiums rise for a portion of recipients (see Could My Medicare Bill Soar in the Coming Year?)

How can the government justify no COLA for those on a fixed income? The problem is how the COLA for retiree payments is measured. For those on a fixed income, the two most critical cost factors are food and medicine, but the COLA is based on the government measure of inflation for the general population, not just the costs that most affect retirees. That measure of inflation includes a broader basket of goods and one key portion of that basket – the price of gas – was down 90 cents a gallon in 2015.

We know for sure that medical costs are increasing much faster than inflation rates, and food costs are also higher. And aging brings the need to hire more caregiving help. The loss in seniors' buying power is estimated at 22% since 2000, even with COLA increases, writes Owen Houghton, an aging-wellness educator and past chair of the state Committee on Aging in New Hampshire.

Some Hit Harder Than Others

Some seniors will be hit harder than others because Social Security does protect 70% of seniors from getting an increase in their Medicare Part B premium; still, 30% will bear the brunt of the increasing medical costs. That's because Social Security law includes a hold harmless provision, which prohibits an increase in Part B premiums that would cause seniors to get a decrease in their Social Security checks.

However, some seniors on Medicare do not get Social Security checks, so they will face a Medicare Part B premium increase. Also, seniors with incomes above $85,000 for individuals and $170,000 for couples will see their Medicare premiums rise.

When the government first announced that there would be no COLA, the Centers for Medicare & Medicaid Services predicted a 52% increase in premiums for that 30% of seniors who are not protected by the hold harmless clause. Congress did pass the Bipartisan Budget Act of 2015, signed into law by President Barack Obama on November 2, which minimizes the increase for those impacted by the no COLA decision.

If the budget act had not passed, 30% of seniors would be paying a $159.30 Medicare Part B premium while 70% pay just $104.90. Thanks to the budget act that last figure will increase by $16.90 to $121.80 per month.

Who Pays Higher Premiums?

1. Medicare beneficiaries who are dually eligible for Medicare and Medicaid. The premiums for these seniors are paid by State Medicaid programs.

2. Higher-income Medicare beneficiaries – those earning more than $85,000 if single or $170,000 if a couple. The premiums for this group will be even higher and range from $170.50 to $389.80, depending on income. The highest premium is paid by singles earning more than $214,000 and couples earning more than $428,000.

3. Medicare Part B enrollees who do not receive Social Security benefits. These seniors have chosen not to take Social Security yet but have signed up for Medicare. As anyone born between 1943 and 1954 does not reach full retirement age until the age of 66, this group is increasing in number as people delay retirement. (For more, see What does full retirement age mean in regards to Social Security?)

4. New Medicare enrollees in 2016. Those who first sign up for Social Security and Medicare will pay the higher premium because they are not protected by the hold harmless clause, as they were not collecting Social Security in 2015.

In addition to some people paying higher Medicare premiums, all Medicare beneficiaries will have to pay a higher deductible in 2016. The annual Part B deductible will be $166 in 2016, up $19 over the 2015 amount of $147. Whether or not a senior must pay the deductible out of pocket will depend on the type of insurance the senior carries. For example, seniors with a Medigap​ or supplemental insurance may not be affected by this increase because the policy covers deductibles. Some Medicare Advantage plans also cover the deductible.

As long as there is a COLA in 2017, everyone should start paying the same Medicare Part B premiums again in 2017. Medicare Trustees projected that the Part B premium for 2017 will be $120.70 and the Part B deductible will be $169. There will also be a $3 repayment of funds borrowed to cover the shortfall in premiums for 2016. Yes, even though seniors will not have to pay for increased Part B premiums due to the lack of COLA, they will need to pay that money back in the future.

Seniors who did not get an increase can expect an $18.80 increase per month in 2017 to $123.70. Seniors who already started paying the higher amount in 2016 will see only a $1.90 increase from the 2016 rate, as premiums again become the same for everyone.

Still, if the 2017 COLA does not cover the full $18.80 increase, the hold harmless clause will again be used to protect those receiving Social Security benefits.

The Bottom Line

With no COLA for Social Security recipients and Medicare premiums and deductibles rising, not to mention rising food costs, seniors' buying power will be reduced in 2016. Some, however, will be affected more than others. Click here for a detailed rundown of the new costs.

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