Every year, Social Security recipients look forward to the slight cost-of-living adjustment to their benefits that comes in January. After years of little or no increase, 2018 finally looked to be a saving grace for many seniors, with Social Security benefits slated to rise by 2% beginning this month.
However, now that the calendar has changed and the new year has begun, some recipients are starting to find out that their benefits aren't going up nearly as much as they'd hoped. Some likely won't see any boost at all. The reason has to do with how Social Security interacts with Medicare, and what the past several years of nearly no Social Security increases has meant for the way the government collects Medicare premiums.
I thought I was supposed to get 2%!
It's indeed true that the Social Security Administration's calculations of how much cost-of-living adjustments would be this year did indeed work out to a 2% rise. When you take the average of the inflation measure that the SSA looks at for the summer months of July, August, and September and then compare it with the average for the same period in 2016, the figure rose by just less than 2%, with the actual figure close enough to spur the government to round it up neatly.
That might not sound like much, but the number is the best increase since 2012 for seniors. Typical retirees expected to get between $25 and $30 extra per month in their Social Security checks based on that percentage amount, which would be a small but still welcome rise.
Why did Medicare take my Social Security raise away?
What many people don't realize is that if you get Social Security and are on Medicare, the government deducts your Medicare premiums for Part B medical insurance from your Social Security payment. That simplifies things for the government, but it means that your take-home Social Security benefit doesn't go up as much as the cost-of-living adjustment would suggest when Medicare premiums rise, as they typically do.
However, at first glance, it doesn't really make sense that Medicare would have any impact on Social Security benefits this year. In an unusual development, baseline premiums for Part B for most Medicare participants stayed the same in 2018 at $134 per month, unchanged from 2017 levels. If Medicare costs the same, why would your Social Security be smaller?
The answer has to do with Medicare increases in past years and a special law designed to protect retirees. In 2016, Medicare Part B premiums rose from $104.90 per month to $121.80. With no cost-of-living adjustment for 2016 because of falling prices, Social Security recipients could have seen a cut to their monthly benefits of almost $17. However, in years where Medicare premiums rise by more than the cost-of-living adjustment for Social Security, Medicare doesn't collect the higher amount. This practice is known as the hold harmless provision, and for 2016, it meant that monthly Medicare Part B premiums for those covered by Social Security remained at $104.90.
The trade-off for the hold harmless provision is that when Social Security benefits do go up in future years, Medicare gets to claw back what it couldn't charge in the past. In 2017, the 0.3% cost-of-living adjustment allowed collected premiums for most beneficiaries to rise above $104.90, but the average of about $109 per month was again far less than the $134 per month that Medicare charged those who weren't covered by Social Security in 2017. Only with the larger 2% cost-of-living adjustment that applies to 2018 will the boost to monthly checks for typical retirees be enough to make up the difference between what Medicare participants have actually paid in past years and what they would have paid had it not been for the hold harmless provision.
Wait for good news until 2019
The only silver lining for Social Security recipients is that thanks to the larger 2% rise in Social Security benefits in 2018, most people have seen what they're paying for Medicare catch up to what the program charges those who aren't covered under Social Security. That means that any cost-of-living adjustment for 2019 and beyond should fall through to retirees' pockets -- assuming, of course, that there's no big boost in Medicare costs. Unfortunately, knowing that the future looks brighter won't make things easier for Social Security recipients right now.