Come January, most U.S. retirees will get some welcome news when they check their bank accounts - the biggest inflation adjustment to Social Security benefits in eight years.
The federal government on Thursday announced a 2.8 percent Social Security cost-of-living adjustment (COLA) for 2019; seniors will see the raise in their January benefit payment. That is the largest increase since 2012, when the COLA was 3.6 percent.
Social Security: What to know
Just as encouraging, health insurance will take a smaller bite out of benefits next year. The standard Medicare Part B premium is forecast to rise just $1.50 to $135.50, according to the program’s trustees. Since the premium typically is deducted from Social Security payments, that means most beneficiaries will get to keep most of the COLA. (The official Part B premium will not be announced until later this year.)
COLAs are determined by an automatic formula tied to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). With inflation running very flat since the recession of 2009-2010, COLAs have been anemic in some recent years - there was no COLA at all in 2015, and it was three-tenths of 1 percent in 2016. The COLA awarded for 2018 was a more generous 2 percent.
But for many retirees, that increase was blunted by the impact of the little-understood hold-harmless rule, which prohibits the dollar amount of Part B premium increases from exceeding the dollar amount of the COLA for roughly 70 percent of beneficiaries. The rule ensures that net Social Security benefits do not fall when the dollar amount of the Part B increase is greater than the dollar amount of the COLA increase. Last year, however, due to some quirky dynamics of how the COLA and Part B premium interact, the COLA was wiped out for many seniors.
This year should be different for most beneficiaries. For example, assuming the standard Part B premium winds up at $135.50 in 2019, the 2.8 percent COLA will translate to a $40.50 monthly net raise (after the Medicare premium adjustment) for a beneficiary receiving $1,500 this year.
The math will be less straightforward for beneficiaries who currently pay less than the standard Part B premium - again due to the hold-harmless rule, which kept their premiums down in recent years. That group includes roughly 25 percent of all Medicare beneficiaries, according to research by the Senior Citizens League - in most cases, lower-income seniors. Most of these retirees will see their premium jump up to the standard 2019 level, consuming a larger portion of the COLA.
“That’s where we will see the biggest bite taken out of the COLA next year,” said Mary Johnson, a Social Security policy analyst for the League.
The long view on health inflation
Despite the overall good COLA news, rising healthcare costs continue to pose a long-term threat to net Social Security benefits. For example, the Medicare trustees project that the Part B premium will start rising at a faster pace beginning in 2020, rising anywhere from 5.6 to 10 percent annually through 2026.
Overall healthcare inflation is projected to rise 4.22 percent over the coming 20 years, according to a report released last week by research firm HealthView Services. That is down from HealthView’s 2017 projection of 5.47 percent, due mainly to moderation of projected prescription drug costs. HealthView cited ongoing shifts by consumers from brand names to less expensive generics, and the earlier-than-expected closing of the doughnut-hole gap in plan coverage.
Still, HealthView calculates that healthcare expenses will consume about half (48 percent) of lifetime Social Security benefits for a healthy 66-year-old couple retiring this year. And the squeeze will get worse in the years ahead due to healthcare cost inflation. HealthView calculates that a 55-year-old healthy couple will need 57 percent of their benefits to cover future retirement healthcare costs, and a 45-year-old couple will spend 63 percent.
“That’s very worrisome, since so many seniors rely on Social Security for most of their income,” said Ron Mastrogiovanni, HealthView’s chief executive officer.
One way that seniors can control cost is to take advantage of the annual fall Medicare enrollment season, which begins on Oct. 15 and runs through Dec. 7. This is the time of year when you can make changes to your basic coverage and prescription drug insurance. Prescription drug premiums, in particular, are volatile and can jump dramatically from year to year.
“People really need to do an annual checkup on their Part D coverage,” said Johnson. “Unfortunately, most seniors don’t do it.”
In some cases, seniors can mitigate those costs through improved health management of chronic conditions, the report finds. Mastrogiovanni also recommends making modest increases in contributions to retirement saving accounts to offset costs. “The simple idea of improving the management of health conditions and investing the savings underscores a key point – taking retirement healthcare off the table as a concern is an achievable goal.”
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