No Social Security COLA Causes Medicare Flap

The 2015 Social Security Trustees Report assumes that – for just the third time since the automatic adjustments were adopted in 1975 – Social Security recipients will not receive a cost-of-living-adjustment (COLA) in 2016. The reason is that the Consumer Price Index is not expected to increase in the base period used to determine the COLA. 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. This flap 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. Because, for a number of reasons, the COLA does not fully reflect the increase in health care costs faced by the elderly, the net Social Security benefit does not keep pace with inflation. This brief explores the interaction of inflation, Medicare premi­ums, and Social Security benefits. The discussion proceeds as follows. The first sec­tion describes Social Security’s COLA. The second section describes how Medicare premiums are calcu­lated and explains next year’s flap. The third reports that Medicare Part B premiums have increased more than twice as fast as the COLA and discusses three reasons why this differential matters for non-medical care spending. The final section concludes that, while the inflation adjustment in Social Security is extremely valuable, the rise in Medicare premiums undermines the ability of beneficiaries to maintain their purchasing power for non-health-care items.