What’s Up With Medicare Premiums? How Increases Are Determined

If you are collecting Social Security and covered by Medicare, you may be wondering why your Medicare premium didn’t increase for 2010… or if it did increase, why did it – since it didn’t increase for so many?

To understand this quandry, we need to look at the system for determining increases to Social Security benefits first.

Social Security – No COLA Increase for 2010

For the year 2010, there is no Cost-Of-Living Adjustment (COLA) in Social Security benefits.  This is reflected by the fact that the Consumer Price Index (CPI) had not increased for the year (as of May, when the figures are determined).  While the COLA figures don’t parallel the CPI exactly, the CPI is a rough guide to follow when determining increases.

This is the first time in over 30 years that there will not be a COLA – there has been an automatic increase in benefits every year since 1975.  The 2009 increase was larger than average, at 5.9%.

Impact to Medicare

So what does this mean for Medicare costs?  Well, for most folks (about 75%) receiving Social Security, part of the news isn’t all bad:  since you already receive Medicare Part A for no premium, this will not change; and your Part B premium is linked to the COLA for Social Security, so it will remain unchanged for 2010 at $96.40 per month.  What isn’t linked to COLA is Part D drug coverage, so this will likely increase for most all beneficiaries, by a factor of approximately 7% – the average monthly premium will increase by $2 a month, from $28 to $30.

The Other 25%

How can you know if you’re in the 75% that will have unchanged Medicare Part B premiums or the “other” 25%?  One of the following three circumstances puts you into the “other” 25%:

• You don’t have Medicare Part B premiums withheld from your Social Security checks;
• You just started receiving Medicare benefits in 2010; or
• You make too much money.

So, what’s too much money?  Medicare Part B premiums start to increase when your income is $85,000 for single filers, or $170,000 for joint tax filers.  At this level, your Part B premium will increase to $110.50 per month, an increase of roughly 15% over 2009’s cost.  Incidentally, this is the same premium that you can expect to pay if your income is not the factor but rather one of the first two circumstances applies to you.

As your income increases, the Part B premium increases as well, up to $353.60 per month if your income is above $214,000 for single or $428,000 for joint filers.

Summary

All in all, this isn’t a terrible thing – of course it’s not welcome, but it could be much worse.  The decision to bypass the COLA was made in May of 2009, and inflation has been pretty much benign since then.  For the majority of Social Security recipients, the overall impact should be minimal.

This is not to downplay the significance, especially to low-income seniors who rely almost exclusively on Social Security benefits, as many other costs (energy costs, food, housing, etc.) have increased, plus the value of home real estate has decreased dramatically.  These factors taken together can have a devastating impact on folks who have no other “safety net” available to them.  If you’re not presently in the position to have these concerns, you should take this information as a warning:  it is critical to develop additional resources to be ready and available in the case that subsidized sources of income are not available or are limited when in retirement.

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Jim Blankenship, CFP®, EA, is an expert in personal retirement, IRAs, and tax issues, with more than 20 years of experience in the industry.  . Read more from this author