October 20, 2010
Wednesday PM

The announcement that next year there will be no cost-of-living adjustment in Social Security checks for the second year in a row is disappointing for everyone receiving benefits, but there's a silver lining for two groups of people.

One is high-income earners. Because there was no cost-of-living adjustment, the Social Security wage base -- the annual income subject to Social Security tax -- will remain at $106,800 for a third straight year in 2011.

The other is seniors who participate in Medicare Part B, the voluntary insurance program that covers doctors' visits and outpatient care. Because there was no Social Security COLA, most seniors who have Medicare Part B insurance will have no increase in their premiums in 2011 for the second year in a row.

However, a small percentage of Medicare Part B participants will pay higher premiums next year -- and the increase will be even bigger than it would have been if there had been a Social Security adjustment. They will have to pay more because others don't have to.

This oddball outcome stems from a provision in the law that didn't matter much until inflation disappeared.

The background: Each October, Social Security announces how much benefits will go up the following year based on changes in the Consumer Price Index for Urban Wage Earners, or the CPI-W. Because there was no increase in the CPI-W over the relevant time period, there will be no increase in Social Security benefits in 2011.

Near the end of the year, Medicare announces Part B premiums for the following year. Most participants have their Part B premiums deducted from their Social Security checks.

By law, Medicare Part B participants, as a group, must pay for 25 percent of the program's cost through their premiums. Almost everyone pays the same monthly premium except for higher-income people, who pay a surcharge every year.

To make sure that soaring medical premiums don't leave seniors with smaller Social Security checks, in 1987 a hold-harmless provision was implemented for most participants. It said if the dollar increase in their Medicare premium is bigger than the dollar increase in their Social Security check, they don't have to pay the excess -- they are held harmless for that amount.

Four groups of people are always excluded from this protection: Certain high-income people, people who are new to Medicare, people who are not covered by Social Security and low-income people who are eligible for both Medicare and Medicaid. These four groups account for roughly 25 percent of Part B participants this year.

Because the law requires participants to pay 25 percent of the program's cost no matter what, whenever some participants are held harmless, the amount they don't have to pay must be borne by those who are not held harmless.

For a long time, the provision "had little widespread impact," says David Certner, policy director with AARP.

Even though medical costs were rising at a faster rate than the CPI-W, the Medicare premium -- roughly $100 a month -- is a small part of most people's Social Security check. The average check is around $1,000 a month.

So there could be a big percentage increase in the Medicare premium and it still would not exceed the dollar increase in most people's Social Security checks. Before last year, only people with very small Social Security checks were held harmless. In 2006, only 3 percent were held harmless, according to a report by the National Health Policy Forum.

That changed drastically in 2010, when there was no increase in the Social Security COLA for the first time since it was created in 1975.

This zero percent increase "meant that any increase in the Part B premium would diminish Social Security income in dollar terms," the report said.

As a result, the 75 percent of participants in the protected class paid the same premium as last year and the 25 percent in the excluded class absorbed the entire cost of the premium increase. The same will be true for next year.

E-mail Kathleen Pender at kpender(at)sfchronicle.com

 

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