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Medicare premiums taketh what Social Security giveth?

Medicare premiums are slated to rise – by about $10 a month – for most recipients in 2012. These higher Medicare premiums will eat into the extra $39 a month that the average Social Security recipient is expected to get from next year's cost-of-living adjustment.

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In May, the Medicare trustees said they expected the Part B premium to be $106.60 a month in 2012, a figure that could change when the actual premium is set. At that rate, about a quarter of Medicare beneficiaries would see their premiums go down. The rest would pay $10.20 more each month, erasing about a fourth of Social Security COLA for the average recipient.

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An Obama administration official suggested the Part B premium could be lower than the projection, but did not reveal the amount.

"The administration will have an announcement about premiums in the days ahead that we believe will alleviate some of these concerns," said the official, who spoke on condition of anonymity. The official was not authorized to speak publicly about the upcoming announcement.

AARP Executive Vice President Nancy LeaMond said the COLA "underscores the importance of Social Security as the only guaranteed, lifelong and inflation-adjusted source of retirement income for most Americans."

"Unfortunately," she added, "the increase announced (Wednesday) will not completely ease their burden.Medicare premiums are also expected to rise for many. And with the decline in housing values, deep losses to retirement and savings accounts, and skyrocketing health and prescription drug costs, millions of older Americans continue to struggle to make ends meet."

The amount of wages subject to Social Security taxes will also go up next year, resulting in a tax increase for about 10 million workers, the Social Security Administration said. This year, the first $106,800 in wages is subject to Social Security payroll taxes. Next year, the limit will increase to $110,100.

Workers pay a 6.2 percent Social Security tax on wages, which is matched by employers. For 2011, the tax rate for workers was reduced to 4.2 percent. The tax cut is scheduled to expire at the end of the year, though President Barack Obama wants to expand it and extend it for another year, an effort that Congress is likely to approve.

Federal law requires the program to base annual payment increases on the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W. Officials compare consumer prices in the third quarter of each year — the months of July, August and September — with the same months in the previous year.

If consumer prices increase from year to year, Social Security recipients automatically get higher payments, starting the following January. If prices drop, the payments stay unchanged.

Social Security payments increased by 5.8 percent in 2009, the largest increase in 27 years, after energy prices spiked in 2008. But energy prices quickly dropped and home prices became soft in markets across the country, contributing to lower inflation in the past two years.

As a result, Social Security recipients got an increase in 2009 that was far larger than actual inflation. However, they couldn't get another increase until consumer prices exceeded the levels measured in 2008. This year, consumer prices in July, August and September were 3.6 percent higher than those measured in 2008, resulting in the COLA.