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Social Security Changes for 2016

By now, you may have heard that no cost of living (COLA) increase is expected for 2016.  Many seniors rely on Social Security for a major portion of their monthly income, so not getting any additional funds for next year  can really put a burden on them.   We saw this same scenario in 2010 and 2011 with no increases.

Why is there no increase?
The amount of cost of living raises that are used for Social Security, Veteran’s pension and compensation benefits, Civil Service Pensions and many other private pensions is based on an index known as the Consumer Price Index.  This is an index used to measure the average costs of a basket of goods (food, gas, medicine, housing, entertainment costs, etc.).  The federal government, through the Bureau of Labor Statistics takes samplings of these costs each year, and based on how the average of those prices increase is the percentage increase that is implemented each year.   This measurement has been taken for almost 100 years.   One of the complaints about the CPI index as it relates to Social Security is that this is not a “fair” measure for senior’s costs.  An example of this is Social Security
that the primary driver of no increase for this year is because the costs of gas/oil has went down since last year.   While all of us enjoy paying less at the pump, seniors tend to use less gas than non-seniors because they don’t commute to/from work 5 days a week.   Also, seniors use more medicines than the non-senior population, but gas is a bigger factor in the CPI equation than medicines are because overall more gas is consumed than medicines.  So, for seniors, their medicine prices might have went up by $50/month, but their spending on gas might have only decreased by $25/month.  Overall, their total spending was increased by $25, but no raise is given.   While we might agree that that CPI is not the most appropriate benchmark to use, it is what the law provides- so until that changes we are stuck with it.

What about Medicare costs?

Virtually all social security recipients have their premium for Medicare Part B (which covers Dr. visits, durable medical equipment, therapy amongst other things) taken from their Social Security benefit.   This cost is typically $104.90 per month.  The Medicare Part B premium is NOT scheduled to remain constant for the next year based on the formula used to calculate this premium.   The Part B premium is supposed to be equal to 25% of the total costs to the government to provide the services divided by the number of recipients.  If the government paid $10 billion on Medicare part B and there were 25,000,000 Medicare recipients, the premium should be $100 (25,000,000 x 4 x 100= $10,000,000,000).  So, if those total costs were expected to go up by $1 billion next year,  then the premium should raise by $2.50 for all beneficiaries.   However, there is a provision in the law that says that a Social Security recipient cannot see their Social Security check go down if the costs of the Medicare Part B premium exceed the inflationary increase.  But this only applies to certain groups of Social Security recipients, typically people who were already getting a check (if you haven’t gotten a check yet, then your check can’t go down), people who aren’t deemed to have income high enough that they should pay more than the 25% of the total costs, and people who did not pay into Social Security (or had a spouse who did).  This group of people is relatively small, around 30% of the total Social Security recipients.

What happens when one provision of a law says that 25% of the total costs must be recouped from the group of Medicare recipients and another provision says that 70% of the people can’t pay any more than they paid last year?  The remaining 30% has to make up the difference, causing their Medicare Part B premiums to up substantially.   Originally, this would have caused a Medicare recipient who was not protected under the hold harmless provisions to see their premium go from $104.90 to $159 per month.   For the higher income earners, this $50 increase would not be all that big of a problem, but for the non-high income earners this can be really problematic as every penny is tight for many seniors on a fixed income.

Congress recognized this and passed a one year “patch” that allowed for the increase to only partially be borne by those groups who were not protected by the hold harmless provisions.  This will cause the premiums to increase from the $104.90 to $121.80 (unless you are a higher income earning senior which is more than $170,000 for a couple and $85,000 for a single).    $121.80 is certainly better than $159, but there is a catch- everyone will have a $3 surcharge added to whatever the premium would normally be in 2017-2019 to make up for the 2016 shortfall.   Overall, this is probably a more equitable solution to the problem, but it will cause even greater increases across the board starting in 2017.