This report shows how the deduction of Medicare Part B and Part D premiums affects Social Security beneficiaries. Annual Cost-of-Living Adjustment

After a person becomes eligible to receive Social Security benefits, his or her monthly benefit amount is increased annually to maintain purchasing power over time. COLAs for 2010 and 2011

SSA has announced that there will be no Social Security COLA in 2010, and both SSA and the Congressional Budget Office predict that there will be no COLA in 2011. Unless they qualify for low-income assistance, Part D participants must pay monthly premiums; they must also pay other out-of-pocket costs when they use Part D services. Over the same period, total Medicare Part B program costs and premiums are expected to increase. In a typical year, the hold harmless provision affects a small fraction of beneficiaries and has a limited impact on program finances. However, in a scenario where Medicare Part B premiums increase but Social Security benefits do not, the effects of the hold harmless provision are larger and more complex. For more information on this issue, please see CRS Report R40561, The Effect of No Social Security COLA on Medicare Part B Premiums , by [author name scrubbed] and [author name scrubbed]. In particular, for monthly Social Security benefit amounts below these thresholds, the dollar amount of the Part B premium increase was greater than the dollar amount of the Social Security benefit increase (which in turn is the previous year's Social Security benefit times the COLA), so that the net Social Security benefit would have fallen relative to the previous year's benefit in the absence of the hold harmless provision. Medicare Part D participants may choose to have their Part D premiums deducted from their benefits or to pay them directly to their prescription drug plan sponsors. By 2010, after 11 years of retirement, the Part B premium absorbed about 8.5% of the medium earner's benefits. Lower earners need a greater fraction of their Social Security benefits to pay the Part B premium than do higher earners. Some low earners may be protected by Medicaid's Part B premium subsidies for low-income beneficiaries. For example, in 2011 it is projected that the Part B premium will absorb 11% of the average initial Social Security benefit in the first year of retirement, and the combined Parts B and D premiums will absorb 14% of the average initial benefit. In 2078 premiums are projected to absorb more than twice that share, with 22% going to pay the Part B premium in the first year of retirement, and 31% of the average initial benefit in the first year of retirement going to pay combined Parts B and D premiums. Conclusion

Rising Medicare premiums are consuming a growing share of beneficiaries' Social Security benefits. Most beneficiaries are likely to have some income apart from their Social Security benefits. Finally, it is important to remember that Social Security beneficiaries gain from their participation in the Medicare program. Together, Medicare and Medicaid cover a majority of participating Social Security beneficiaries' health care expenses. Although Social Security beneficiaries are affected by rising health care costs, the benefits of participating in Medicare are substantially greater than the costs.
Most Social Security beneficiaries pay Medicare premiums. Beneficiaries who participate in Medicare Part B (Supplementary Medical Insurance) or Part D (prescription drugs) must pay monthly premiums, unless they qualify for low-income assistance. Part B participants who also receive Social Security must have the Part B premiums automatically deducted from their Social Security checks. Part D participants may choose to have their premiums deducted from their Social Security checks.
Medicare premiums are absorbing a growing share of Social Security benefits. To see the effect of growing premiums, consider a Social Security beneficiary who earned the average wage throughout his or her career. If this retiree chose to participate in Part B—as the vast majority of Social Security beneficiaries do—the standard Part B premium would have absorbed almost 5% of benefits upon retirement in 2000 and about 8.5% in 2010 after over a decade of retirement. For a new retiree in 2010, the Part B premium absorbs about 9% of the Social Security benefit, and combined premiums for both Part B and Part D absorb about 12% of the average initial Social Security benefit check. Medicare's trustees project that premiums for Parts B and D will grow at a faster rate than average Social Security benefits in the future, thus consuming a greater proportion of benefits over time. In 2078, a retired worker receiving the average initial Social Security benefit amount is projected to need 22% of benefits to pay the Part B premium and 31% of initial benefits to pay combined Parts B and D premiums.
The deduction of Medicare premiums affects beneficiaries differently, depending on their Social Security benefit amounts and total incomes. Medicare premiums absorb a greater fraction of lower earners' Social Security benefits than of higher earners' benefits, because although benefit amounts are progressive, low earners tend to have lower dollar amounts of benefits. However, some low-income beneficiaries are eligible for subsidies that cover their Medicare premiums and other out-of-pocket costs. Other beneficiaries may be protected by a hold harmless provision that prevents a beneficiary's Social Security check from declining due to Part B premium increases.
The Social Security Administration (SSA) has announced that there will be no Social Security cost-of-living adjustment (COLA) in 2010, and both SSA and the Congressional Budget Office predict that there will be no COLA in 2011. Over the same period, total Medicare Part B program costs and premiums are expected to increase. In a typical year, the hold harmless provision affects a small fraction of beneficiaries. However, in a scenario where there is no Social Security COLA, the effects of the hold harmless provision are larger and more complex. For more information on this issue, please see CRS Report R40561, The Effect of No Social Security COLA on Medicare Part B Premiums, by [author name scrubbed] and Alison Shelton.
Finally, it is important to note that although Social Security beneficiaries are affected by rising health care costs, the benefits of participating in Medicare are substantially greater than the costs.