By Mary Johnson, editor
The coronavirus is creating especially challenging long-term impacts for the nation’s retirees. Coronavirus - caused deflation will likely obliterate the Social Security cost-of-living adjustment (COLA) for next year, at the same time causing Medicare Part B premiums to peak at new highs. The combined impact could result in a similar situation to the one last seen in the fall of 2015, when the COLA announced for 2016 was zero. After deduction for Part B premiums, Social Security beneficiaries saw no growth in their net Social Security benefits for up to three more years thereafter.
A crash in oil prices has pulled down the price of gasoline. That has an out-sized impact on the Consumer Price Index (CPI) and especially the CPI-W (Consumer Price Index for Urban Wage Earners and Clerical Workers) which is used to calculate the annual COLA. But because the COLA is adjusted using a CPI that measures cost changes experienced by younger working adults, it doesn’t fairly reflect the cost increases experienced by retirees, especially for medical care. If this sounds like a poor match for an inflation adjustment for retirees, TSCL agrees!
For example, gasoline is weighted more heavily under the CPI-W. In a typical economy where everyone is working normally, energy costs represent a larger share of the spending for younger working adults. A drop of this size in oil prices has a much bigger impact on COLAs than rising medical costs, even though healthcare costs have gone up dramatically in 2020. Under the CPI-W, medical costs have less weight because younger working adults tend to spend less on healthcare. Worst of all, because the CPI-W represents the spending of younger adults, it doesn’t reflect the growth in Medicare premiums (Part B and supplements) at all, which are among the fastest growing costs of adults age 65 and older.
If the COLA for 2021 is zero, we could be in for the biggest jump in Medicare Part B premiums in more than two decades. There are three major factors causing this:
- Higher costs for 2020 already expected. Even before the coronavirus hit, the Department of Health and Human Services estimated that Medicare spending would increase about 2% faster than previously thought in 2019, up from 5%, to 7% in 2020.
- High utilization costs due to COVID-19. Not only are older patients at highest risk of coronavirus, but the disease can require long hospitalizations lasting up to three weeks. In addition, COVID-19 is apt to bring high prescription costs with it, and potential costs for follow-up care.
- Zero COLAs trigger huge spikes in Medicare Part B premiums. When there is no COLA, a special provision of law is triggered that in turn can lead to stratospheric increases in the Medicare Part B premium. Under the Social Security “hold harmless” provision, when the dollar amount of the Medicare Part B premium increases more than the dollar amount of an individual’s COLA, their Part B premium increase will be adjusted downward to prevent a reduction in benefits from one year to the next. This is an important protection for beneficiaries, but it can lead to long periods of no growth in Social Security benefits after reduction for Part B premiums, as beneficiaries get caught up to current premium levels down the road. Even worse, not all beneficiaries are protected by “hold harmless.” About 30% of Medicare beneficiaries are not, and the overall program cost for Medicare Part B premiums is spread over this much tinier group. Instead of 57 million people paying Part B premiums in 2021, the premium may be spread over just 18 million who then bear the entire burden of significantly higher costs.
After the COLA announcement in 2015, the Medicare Trustees initially projected that Part B premium and deductible amounts would increase by an unprecedented 52% from $104.90 to $159.30 between 2015 and 2016. Senior advocates, including TSCL urged Members of Congress to enact legislation which reduced the Part B premium to $121.80. That was still an increase of more than 16% over the previous year.
What can we do to avoid this situation again in 2020? If the COLA is zero, then emergency legislation may again be required, either to adjust the Medicare Part B premium, or to provide Social Security recipients with an emergency COLA high enough to offset increased Medicare premiums.
I’m interested in hearing your comments about this situation, and learning how rising costs are impacting your retirement. Send us an email at www.SeniorsLeague.org.