PhotoThe latest report from the Social Security Trustees Report assumes that for just the third time since the automatic adjustments were adopted in 1975, people who receive Social Security payments will not receive a cost-of-living-adjustment (COLA) in 2016.

COLAs only kick in when the Consumer Price Index (CPI), the official gauge of inflation, goes up. The CPI is not expected to increase in the base period used to determine the COLA.

A report by the Center for Retirement Research at Boston College says this would have an unintended consequence that would sock some Medicare recipients with a significant Medicare premium hike.

“Cause a flap”

“The anticipated lack of a Social Security COLA will cause a flap in the Medicare program because, by law, the cost of higher Medicare Part B premiums cannot be passed on to most beneficiaries when they do not get a raise in their Social Security benefits,” the authors write.

This unintended consequence also highlights the complicated interaction between Medicare premiums, which are generally deducted automatically from Social Security benefits, and the net benefit – the money available for non-health care expenditures.

According to the report, the Social Security COLA does not fully reflect the increase in health care costs faced by the elderly because the net Social Security benefit does not keep pace with inflation. While many seniors rely on the inflation adjustment in Social Security, “the rise in Medicare premiums undermines the ability of beneficiaries to maintain their purchasing power for non-health-care items.”

Medicare recipients are accustomed to paying more each year in premiums. The report finds that, barring any complicating factors, the premium would increase from $104.90 in 2015 to $120.70 for 2016.

Hold-harmless provision

But here's the rub; the law contains a hold-harmless provision that limits the dollar increase in the premium to the dollar increase in an individual’s Social Security benefit. This provision applies to roughly 70% of Part B enrollees. They have nothing to worry about.

The remaining 30% aren't covered by the hold-harmless provision. They include new enrollees during the year; enrollees who do not receive a Social Security benefit check; enrollees with high incomes (who are subject to the income-related premium adjustment), and dual Medicare-Medicaid beneficiaries - whose full premiums are paid by state Medicaid programs.

Because 70% of Medicare recipients would see no increase in the absence of a Social Security COLA, the Part B premiums for the remaining 30% must be raised enough to offset the rising costs.

52% premium hike

“Under the intermediate economic assumptions, the estimated monthly premium in 2016 for these other beneficiaries is $159.30,” the authors write. “That means that, unless the Administration figures out some workaround, the base Part B premium would rise from $104.90 to $159.30 – a 52% increase.”

For higher income participants, the premiums would rise even higher, based on multiples of $159.30.

“Clearly, political pressure will build for some kind of work-around,” the report concludes.

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