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Why this Social Security boost is no boon for lower earners

Editor’s Note: Journalist Philip Moeller is here to provide the answers you need on aging and retirement. His weekly column, “Ask Phil,” aims to help older Americans and their families by answering their health care and financial questions. Phil is the author of the new book, “Get What’s Yours for Medicare,” and co-author of “Get What’s Yours: The Revised Secrets to Maxing Out Your Social Security.” Send your questions to Phil.

It’s heartburn time for the hold-harmless crowd, thanks to the seemingly routine announcement by Social Security last week that its annual cost of living adjustment for 2018 will boost benefits by 2 percent.

Thanks to the convoluted rules brought to you by the folks who run Social Security and Medicare – not to mention their overseers in Congress – it will take me some time to explain why this news means that millions of people receiving Social Security and Medicare will suffer next year from financial indigestion.

READ MORE: 4 tips for making the most of Medicare’s open enrollment

Medicare recipients also receiving Social Security must have their monthly Part B Medicare premiums deducted from their Social Security payment. About 70 percent of Medicare enrollees are in this boat. The rest are either new to Medicare, earn enough to trigger Medicare’s high-income surcharges, or earn so little that Medicaid pays their Medicare premiums.

Social Security’s “hold harmless” rule says that Social Security benefits cannot decline from one year to the next. This means that higher Part B premiums can’t cause a reduction in a person’s net Social Security benefits.

Historically, increases in Social Security’s annual cost of living adjustment (COLA) have been large enough to cover any boosts in Part B premiums and still produce a net gain in Social Security payments.

However, the rate of inflation used to determine the COLA has been so small in recent years that the COLA was zero in 2016 and only three-tenths of one percent this year. With medical costs continuing to rise, Medicare had no choice but to raise its Part B premiums. Even with a one-time government bailout in 2016, the Part B premium went up to $121.80; this year, it rose to $134.

(These premiums, by the way, remain a great health care bargain for Medicare recipients. Medicare only charges enough for Part B to cover about 25 percent of program costs; taxpayers foot the other 75 percent.)

Those higher premiums were paid only by people who were not held harmless. For the larger group that was protected in 2016, their premiums remained at $104.90 a month, while those not held harmless had to pay $121.80. The 0.3 percent COLA this year boosted benefits a bit, but virtually all of these gains went to pay higher Part B premiums.

People not held harmless this year are paying $134 a month for Part B. People who have been held harmless, in most cases, had to tack 0.3 percent of their 2017 Social Security payment onto either $104.90 or $121.80 for their Part B coverage. Because everyone’s Social Security benefits are different, this meant that everyone’s Part B premium would be different as well.

Here are a couple of examples to illustrate the range of different Part B premiums.

Take someone who was held harmless in 2016 and receives only $1,000 a month from Social Security (before Part B premiums are deducted). They were paying $104.90 for Part B in 2016, and received a $3 monthly boost in 2017 Social Security benefits (0.3 percent of $900). All of this paltry increase would go toward higher Part B premiums, raising their monthly premium to $107.90.

Now, consider a higher earner who began Medicare in 2016 and had to pay $121.80 a month for their Part B. If their gross Social Security benefit was $2,500 a month, they would have seen it rise by $7.50 a month this year (0.3 percent of $2,500). They would have been held harmless this year from the full $134 monthly Part B premium. But all of their COLA gain would have gone to paying Part B, and their monthly premium would have increased by $7.50, from $121.80 to $129.30.

Congratulations if you are not totally confused by now, and many thanks if you haven’t simply stopped reading! But if you’ve stuck it out this long, I am betting you also have figured out that the impact of a 2 percent COLA will be much higher Part B premiums for lower earners who have been held harmless.

Medicare has not yet announced the 2018 premium for Part B, although it was earlier projected to remain stable at $134 a month. Even if this good-news projection comes to pass, many of those folks held harmless in 2016 and 2017 will not receive any of their 2 percent Social Security boost. For people receiving modest Social Security benefits, all of the increase will go toward higher Part B premiums.

Using the earlier examples, our lower-earning recipient would see their $903 monthly benefit boosted by about $18.06. All of this would be tacked onto their Part B premium, increasing it from $107.60 to roughly $125.66. This is less than $134, of course, but I doubt that anyone in this situation would consider themselves fortunate to be receiving no effective Social Security increase, even though the 2.0 percent COLA is the program’s largest in five years.

And our higher earner? Their $2,507.50 benefit would rise by $50.15 to $2,557.65. Remember that they were already paying $129.30 each month for their Part B. If the Part B premium does stay at $134 next year, their premium would rise by only $4.70 a month, allowing them to keep more than 90 percent of their COLA increase.

Let the complaints begin!

Next week, I will resume answering your questions, as well as taking a further look at changes in Medicare plans that might cause you to consider 2018 changes to your coverage during this year’s Medicare open enrollment period, which began October 15 and extends through Dec. 7.