Key Points
Social Security and Medicare are two very important programs seniors rely on. Unfortunately, many older Americans don’t fully realize how Social Security and Medicare work, or how they interact, and this could lead to costly surprises in their retirement years.
To ensure that you’re making retirement plans based on the facts, you must know one key Social Security and Medicare rule.
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Here’s the Medicare and Social Security rule every senior should know
The key thing that future (and current) retirees must understand is that most seniors have Medicare premiums taken directly from their Social Security checks. And if Medicare premiums increase, as they do most years, that increase can eat up some or all of the annual Social Security cost-of-living adjustment (COLA) that many seniors collect.
See, Social Security has COLAs built into it to ensure benefits keep pace with inflation. These COLAs result in benefits increasing in most but not all years. However, Medicare premiums also increase in most but not all years. And when those premiums go up, seniors don’t end up getting the full amount of extra money they were expecting from the COLA because a lot of it goes to covering their extra Medicare costs.
In 2017, for example, there was a 0.3% COLA. But Medicare premiums rose by more than that amount, eating up the raise retirees expected to collect.
There’s a silver lining for Social Security retirees
It’s not great news to find out that Medicare premiums can often mean a full COLA doesn’t actually arrive in your Social Security checks. But there is a silver lining. A rule called the “hold-harmless” provision protects retirees from seeing their benefits decline due to Medicare premium increases that exceed the COLA.
Let’s go back to the 2017 situation, with the 0.3% COLA. In 2016, the standard Medicare Part B premium was $121.80, but most beneficiaries protected by the hold-harmless provision were only paying $104.90. This group then saw premiums in 2017 rise only up to the amount of their raise, which meant most paid around $109 for Medicare, not $134, like those paying the standard premium.
Retirees protected by the hold-harmless provision started out paying lower premiums in 2016 because the provision had already protected them from increases in the recent past when there was a low or non-existent cost-of-living adjustment. And the 0.3% COLA meant they didn’t bear the full burden of the new increase in 2017.
Of course, eventually, when a larger COLA happens, premiums will jump back up to the full amount. This could lead to a massive premium increase happening all at once. Retirees must be prepared for the impact of Medicare on their COLAs and should make sure they understand exactly how the rules work, as they will shape their finances.
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