The fourth quarter is an important time of the year for senior citizens. It's when they find out what, if any, raise they'll be receiving from Social Security, as well as how much extra, if any, they'll owe in monthly premiums to Medicare.

Though the two programs might seem to be independent of one another, they're linked at the hip in some respects. In fact, because of a Medicare quirk known as "hold harmless," around 70% of seniors may not see much, or any, of their Social Security cost-of-living adjustment (COLA) in the upcoming year.

A Social Security card wedged between a fanned pile of cash bills.

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Social Security recipients cheer their biggest raise in six years (or so they think)

Back on Oct. 13, the Bureau of Labor Statistics announced its September inflation readings. This was the last piece of the puzzle needed to calculate how much of a raise Social Security beneficiaries would receive in 2018.

The inflationary tether used to calculate Social Security payouts is the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The average reading from the third quarter of the previous year acts as the baseline, while the average reading from the third quarter of the current year is the comparison. If prices for goods and services rise year over year, Social Security recipients receive a commensurate raise, rounded to the nearest tenth of a percent. If prices fall, benefits remain stagnant.

For 2018, Social Security's COLA will be 2%, which is the highest raise in six years. Since 2009, Social Security's COLA has been 0% three times, reflecting year-over-year declines in the CPI-W, and 0.3% for 2017, which was the smallest increase on record. While a 2% COLA isn't exactly game-changing, it looked to be a major win for seniors after years of poor raises. Unfortunately, it appears to be a win in name only for most seniors.

"Hold harmless" could be quite harmful to seniors in 2018

On the other hand, Medicare's Part B premiums -- the premiums that cover outpatient care -- remained unchanged at $134 a month in 2018. That was a welcome sight, considering the recent history of high single-digit and double-digit inflation for Medicare Part B.

However, having Part B premiums remain flat on a year-over-year basis while seeing Social Security's COLA rise 2% in 2018 is going to flip the script for a lot of seniors. By this I mean those who'd been hit hardest by Medicare's premium increases in previous years (about 30% of enrollees) will see no additional Part B costs in 2018, while those who'd been protected by "hold harmless" (about 70% of enrollees) stand to face major Part B premium inflation in 2018.

A frustrated senior woman clasping her head while her doctor presents her with a medical bill.

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Simply put, "hold harmless" protects folks who are enrolled in Social Security and Medicare, and who have their Medicare Part B premiums automatically deducted from their Social Security payout, from seeing their Part B premiums rise at a quicker pace their annual COLA from Social Security. For example, if Part B premiums rose by 9%, but Social Security's COLA increased by just 1%, seniors could see their take-home drop because of higher Part B premiums. For these seniors, "hold harmless" would kick in and ensure that their Part B premiums wouldn't rise by more than their Social Security COLA. Conversely, seniors who are new to Medicare, haven't enrolled in Social Security but are enrolled in Medicare, or prefer to be billed directly for Part B premiums are left to face the full brunt of Part B premium increases each and every year.

In 2018, this latter group won't face a cent in higher costs. But the previous group that's been protected by "hold harmless" will have some catching up to do. Approximately 70% of seniors are paying less than the $134 a month for Part B premiums, meaning their Social Security COLA might go entirely, or mostly, toward boosting their Part B premium back to the standard amount. In fact, 42% of Medicare recipients could face a 23% increase in their Part B costs, from $109 a month to $134.

Amazingly, though, 28% of Medicare recipients will still have a Part B premium of less than $134, even with Medicare gobbling up the entirety of their COLA. 

Consider your alternatives

Given the hefty Part B premium increases millions of seniors could face in 2018, now is as good a time as any for Medicare enrollees to consider their options. In particular, it could be time to examine whether a Medicare Advantage plan, known officially as Part C, is right for you. Today, about one in three eligible Medicare enrollees have chosen a Medicare Advantage plan over original Medicare.

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Rather than having to potentially enroll in Part A (hospital insurance), Part B, and Part D (the prescription drug plan) under original Medicare, a Medicare Advantage plan lumps all of these components under one plan. It would also allow for the addition of hearing, vision, and dental coverage, which isn't offered through original Medicare. There's definitely a beauty in that simplicity, and there may even be pricing advantages, too.

Another prime benefit of Medicare Advantage is the annual out-of-pocket limit for traditional Part A and B costs. Original Medicare doesn't have an out-of-pocket limit, meaning seniors could be stuck with about 20% of costs, which can be exorbitant. Original Medicare enrollees do have the option of buying supplemental insurance to help cover these costs, but it's just another puzzle piece they have to remember.

Of course, Medicare Advantage plans aren't perfect. For instance, their preferred networks tend to be much smaller than original Medicare, and you'll often have to jump through considerable hoops in order to see a specialist. That's the price you pay for purchasing a plan with a contracted insurance company.

Nonetheless, examining your options thoroughly is always a smart move, and it could be especially smart in the upcoming year given the Part B premium increases so many seniors are facing.

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