Retirees need help with basic living expenses, and healthcare is a vital need for people as they age. Together, Social Security and Medicare aim to give retirees vital assistance with their medical and financial obligations. The Centers for Medicare and Medicaid Services, or CMS, cooperate and work together with the Social Security Administration, or SSA, in a variety of ways to ensure that the two programs work as smoothly as possible.

One of the most important ways that Social Security and Medicare work together is in preventing Social Security recipients from suffering financial harm as a result of Medicare increases. A key rule known as the hold-harmless provision helps to ensure that Social Security recipients won't face painful reductions in their monthly benefits even when costs under Medicare are on the rise. However, the way that the hold-harmless provision works doesn't quite match up with the mistaken ideas that many recipients have about how it should work. It's essential to know the facts so that you can avoid any nasty surprises during your retired years.

Form with Medicare on top, with a stethoscope on a wood desk.

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Why the hold-harmless provision exists

The hold-harmless provision stemmed from the fact that the CMS and SSA work together to facilitate their joint operations. Online applications for both Social Security and Medicare run through a page on the SSA website, and those who visit Social Security offices in person can apply for both benefits at the same time if they so choose.

Once you're enrolled in both Social Security and Medicare, the federal government makes things easier by simply withholding your Medicare premiums from your Social Security benefits. You'll therefore get a reduced net amount every month that reflects the payment of your monthly premium for Medicare. That way, you don't have to worry about the SSA making a deposit to your account at the same time the CMS is trying to draw from the same account.

However, changes in what you receive in Social Security and what you have to pay for Medicare don't always match up well. Increases in Social Security benefits come from cost of living adjustments, or COLAs, that are based on overall inflation rates across the economy. However, Medicare looks at specific increases to healthcare costs in determining the appropriate premium increases to implement. During some years, the increase in monthly charges for Medicare premiums has been higher than the boost in monthly benefit amounts for Social Security recipients.

Those who rely on Social Security would have to deal with the prospect of seeing an outright decline in their net monthly checks during such periods. That's where the hold-harmless provision kicks in.

How hold-harmless really works

Many people mistakenly believe that the hold-harmless provision kicks in whenever percentage increases in Medicare costs outpace Social Security's COLA percentage. That would be ideal in helping retirees keep as much of their benefits as possible. However, that's not the way the rule works. Instead, the rule focuses on specific dollar amounts for individuals rather than overall percentages.

As an example, turn back the clock to 2013. In that year, Part B premium rose by 5%, climbing from $99.90 per month to $104.90 per month. By contrast, Social Security's COLA that took effect that year was just 1.7%.

What retirees would have liked was for the increase in the Part B premium to be limited to 1.7%. That would have produced a $101.60 per month premium, saving them a total of almost $40 for the year.

Instead, what the hold-harmless provision did was compare the $5 per month dollar increase in Medicare premiums to whatever the 1.7% COLA translated to for each Social Security recipient. For an average retired worker with a benefit of about $1,300, the COLA worked out to $22 per month. Because $22 is bigger than $5, the hold-harmless provision didn't apply to the average retiree getting Social Security.

However, if you had a very small Social Security benefit, then the hold-harmless rule might have applied. For instance, for someone getting just $200 per month from Social Security, the COLA would have boosted benefits by just $3.40 per month. If you'd had to pay $5 extra for Medicare coverage, your net monthly payment would've dropped by $1.60. So the hold-harmless provision would have let that person pay just $103.30 in monthly Medicare premiums rather than the full $104.90.

A temporary benefit

The other thing to remember about the hold-harmless provision is that it doesn't permanently reduce your monthly Medicare premiums. When future-year COLAs exceed the increase in Medicare costs, then you'll have to make up the difference with additional Medicare premium boosts that you temporarily avoided because of the rule. For instance, in 2014, Medicare costs stayed at $104.90, but Social Security COLAs came in at 1.5%. Even for our $200 benefit recipient in the example above, that would've been enough to push their premium costs all the way up to the full $104.90 amount.

The hold-harmless provision is a key tool to prevent financial hardship for Social Security recipients on Medicare. But it doesn't work as well as many people think it should. Unfortunately, limiting Medicare premium increases to the percentage rate of Social Security COLAs would be a lot more burdensome on Medicare's financial viability, and so it's unlikely that retirees will see any changes in that direction in the near future.

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