The problem with the 'cost of living' formula
Seniors will not be getting a cost-of-living adjustment in Social Security benefits this year, setting off a fresh debate about the program's inflation formula and its impact on Medicare premiums.
The Social Security Administration confirmed this week that benefit payments will stay flat next year due to unusually low energy prices, which have kept overall inflation rates down.
Not a matter of choice
By law, the cost-of-living adjustment (COLA) is determined by a formula that ties it to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which is compiled by the U.S. Bureau of Labor Statistics. But the CPI-W gauges a market basket of goods and services of working people — who tend to be younger and spend less on healthcare than seniors.
This has a couple of repercussions. One is that since there is no COLA, the maximum earnings subject to the Social Security tax will remain at $118,500 next year; also unchanged, at $15,720, is the amount of income from work exempt from the “retirement earnings test” penalty, which is applied to people who claim benefits before their full retirement age.
Another creates an imbalance in Medicare Part B premiums. Medicare has forecast a 52 percent hike in Part B premiums, to $159.30, that will affect 30 percent of Medicare enrollees — about 16.5 million people.
The majority of enrollees will not face any increase because there is a “hold-harmless” provision in federal law that protects most people from Part B increases if there is no corollary cost-of-living increase in Social Security.
Why a legislative fix is a must
Anyone who is delaying filing for benefits faces an increase, some federal retirees and many state government workers — most of whom participate in defined-benefit pension plans and are not covered by Social Security during their tenure as state employees.
Also exposed are low-income "dual-eligible" seniors who receive Social Security and also participate in both Medicare and state-run Medicaid programs. Their premiums are absorbed by state Medicaid budgets. Higher-income beneficiaries subject to an income-adjusted Part B premium are subject to the higher premium; so are people who enroll in Medicare for the first time next year.
Bills have been introduced in the Senate and House that would hold premiums steady for all beneficiaries next year. The deductible for Part B for all beneficiaries would stay at $147, staving off a projected increase to $223.
Advocates for seniors are optimistic that a short-term fix will happen — despite the current chaotic situation in the House of Representatives. “There will a bigger spontaneous grassroots reaction to this than we might normally expect,” says Nancy LeaMond, who heads government affairs at AARP.