The Bad News About Social Security Cost of Living Raises

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By Mark Miller

CHICAGO -- Retirees are facing a double whammy next year: no inflation adjustment in their Social Security benefits and a whopping 52 percent jump in certain Medicare premiums.

The Medicare premium hikes will hit only 30 percent of beneficiaries: those who aren't protected from a "hold-harmless" provision in federal law that prohibits any premium hike that produces a net reduction in Social Security benefits. But the increases suggest strongly that the recent trend of moderate health care inflation is ending.

Social Security Changes

Final figures for 2016 won't be available until the fall, but the recent annual report of Social Security's trustees projects that there won't be any cost-of-living adjustment next year.

The COLA is determined by averaging together third-quarter inflation as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers. Inflation has been flat due to collapsing oil prices.

The forecast underscores the need for a better gauge of the health care inflation that disproportionately affects seniors.

Advocates have argued for years that an alternative, the Consumer Price Index for the Elderly, would do just that.

If the CPI-E had been in place from 1985 to 2014, Social Security benefits last year would have been 6.5 percent higher than they are today, according to an analysis by J.P. Morgan Asset Management.

The Health Care Front

Health care inflation has been quiet lately -- annual growth in total Medicare spending averaged 4.1 percent from 2010 to 2014, compared with 9 percent from 2000 to 2010 -- even though the number of enrolled beneficiaries rose.

But renewed cost pressures are pointing toward much higher Medicare premiums starting next year, according to the Medicare trustees' annual report.

Consider the monthly premium for Part B (outpatient services), which has stayed at $104.90 for the past three years. The Medicare trustees projected that the premium will jump 52 percent, to $159.30 for beneficiaries who aren't protected by the hold-harmless provision.

That would include anyone enrolled in Medicare who isn't yet taking Social Security benefits due to a decision to delay enrollment. It also would include new enrollees in Medicare next year. (The increase also would be applied to low-income beneficiaries whose premiums are paid by state Medicaid programs).

High-income retirees -- another group that isn't protected by the hold-harmless provision -- also will be hit hard if the trustee projections hold.

Affluent seniors already pay more for Medicare Part B and also Part D for prescription-drug coverage. This year, for example, higher-income seniors pay between $146.90 and $335.70 monthly for Part B, depending on their income, rather than $104.90.

The Medicare trustees now project that to jump even more.

"When you combine it all, it's looking pretty ugly," says Sharon Carson, a retirement strategist at J.P. Morgan Asset Management.

Higher costs for the affluent look like a trend that could accelerate further. The recently passed "doc fix" legislation (which corrects long-standing problems with reimbursement rates to physicians) shifts a higher percentage of costs to higher-income seniors starting in 2018.

Seniors with incomes of $133,000 to $160,000 would pay 65 percent of total premium costs, rather than 50 percent today. Seniors with incomes between $160,000 and $214,000 would pay 80 percent, as they do today.

"Congress will probably go back to that well again," predicts Carson, and she thinks one possible outcome will be lower income thresholds.

More Impact

Medicare premiums aren't the only area where seniors may feel the impact of impending health care inflation. The median health care cost for a 65-year-old in 2014 was $4,400, according to recent J.P. Morgan research; the firm expects those costs to rise at an annual rate of 6.1 percent over the next 20 years, to $17,000 at age 85 (the costs include Medicare Part B, Part D, and Medigap premiums, out-of-pocket expenses, and vision and dental services.)

If you want to be prudent in your retirement planning, Carson advises assuming inflation of 7 percent going forward. Coping strategies include keeping at least some portion of your portfolio in equities well into retirement, and taking steps to minimize ordinary income, with an aim to stay out of the high-income premium surcharge brackets.

"The common wisdom is to withdraw money from the IRA or 401(k) last," says Carson. "But doing some of that in the early years -- or doing some Roth conversion -- can help."

(The writer is a Reuters columnist. The opinions expressed are his own.)
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