2012 Social Security COLA is a Whopping 3.6 Percent, But Medicare Will Take A Bite
Mark Miller

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After two years without an inflation adjustment, seniors will get a 3.6 percent Social Security cost-of-living adjustment (COLA) next year. That's a sizable raise in this economy, and very welcome news to seniors hit hard by rising costs, slumping home equity and very low returns on fixed-income investments.

Analysts had been forecasting a COLA north of 3 percent for weeks, and the number isn't that tough to predict. Although angry seniors have been denouncing politicians and bureaucrats for stiffing them during the past two lean years, the fact is that they had nothing to do with it.

By law, the COLA is determined by a formula that averages inflation for the third quarter, as reflected by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). No COLA was awarded in 2010 or 2011 due to a quirky spike in the third quarter of 2008, which resulted in a whopping 5.8 percent COLA for 2009. By law, subsequent Social Security payments couldn't rise until the CPI-W exceeded the 2008 level.

This year, the third quarter CPI-W has been running high as a result of rising energy costs. So the generous 3.6 percent raise -- which will turn up in January payments -- was baked into the inflation data over the past several months.

That's the good news. Now for the bad: Many seniors will see part of the COLA consumed by a higher premium for Medicare Part B (doctor visits and outpatient services), which usually is deducted from Social Security payments. The reasons why shed light on the complex way that Social Security COLAs and Medicare premiums interact.

The Part B premium usually rises at a rate greater than general inflation -- a reflection of medical inflation. However, by law, the premiums cannot rise in any given year by a greater amount than the Social Security COLA -- a "hold harmless" provision aimed at preventing Social Security payments from ever falling.

About 75 percent of beneficiaries were exempted in this way from Part B premium increases in 2010 and 2011. Rate hikes were paid only by two groups of seniors: low-income beneficiaries whose premiums are paid by Medicaid (so-called "dual eligibles") and high-income seniors who pay income-related surcharges.

High-income seniors actually were hit in several ways: not only did they pay higher premiums, but also the rate increases were greater than they would have been absent the "hold harmless" provision. Under the law, Medicare enrollees cover 25 percent of projected Part B program costs; in 2010 and 2011, that projected cost was borne by a much more narrow base of beneficiaries -- and by Medicaid, which also was stuck with part of the additional tab.

In 2010, the base Part B premium jumped to $110.50 from $96.40 for beneficiaries who actually paid it -- and it rose to $115.40 in 2011. On top of that, the high income group paid additional surcharges based on their income levels.

The 2012 Part B premium will be announced in early November. Analysts think it will be somewhere around $104 per month -- partly because the pool of seniors subject to higher premiums will be so much larger. Oddly enough, that will mean a lower base premium for the 25 percent of seniors who fall into the high- or low-income groups -- or for those who enrolled for the first time this year and are paying the $115.40 premium.

But what will it mean if you're part of the other 75 percent -- the vast middle group of seniors? That depends on your actual Social Security benefits, because the Part B premium deduction is a flat amount.

Let's say you receive the average benefit -- currently $1,177 per month. The 3.6 percent COLA will lift your gross 2012 payment to $1,219. Assuming a Part B premium of $104, you'll pay $7.60 more each month for Part B, reducing your net benefit to $1,211 -- a raise of 2.95 percent.

That's still a pretty healthy raise. But the math is less favorable for seniors with below-average benefits. For example, if your monthly benefit is $700, your after-Medicare COLA would be just 2.5 percent; if your benefit is $500, the increase would be just over 2 percent.

Part B's impact on Social Security offers a vivid reminder that seniors are impacted by different types of inflation than the general population, mainly due to medical costs. From 2000 to 2011, the premium increase has averaged 9 percent, and it has increased by double-digit percentages four times. By contrast, the Social Security COLA averaged 2.8 percent from 2000 through 2010.

The COLA news also underscores the critical importance of the Super Committee deficit deliberations on possible cuts to future COLAs now underway in Washington. While medical costs continue to bite hard into seniors' pocketbooks, the Super Committee is said to be taking a hard look at cutting COLAs by implementing a formula change using the so-called chained CPI. The chief actuary of the Social Security Administration (SSA) estimates that the chained CPI will rise about 0.3 percentage points less per year than the CPI-W.

Talk of adopting a chained CPI already is ringing the alarm bells of Social Security advocates, many of whom have been pushing for adoption of the experimental CPI-E (for elderly) -- a more generous COLA that better reflects seniors' costs.

"Social Security does not add a penny to the deficit and it shouldn't be part of the deficit discussions," said Nancy Altman, co-director of the Strengthen Social Security coalition. "The President made it clear that he wanted Social Security on a separate track, but I'm hearing from very credible sources that the Democrats are putting Social Security into play, and that the chained CPI is being considered very seriously."

A final note: The SSA also announced an adjustment to the maximum amount of earnings subject to the Social Security payroll tax. That number is based on a formula measuring increases in average wages; based on that increase, the maximum amount of earnings subject to tax will rise in 2012 to $110,100 from $106,800. The SSA estimated that 10 million of the estimated 161 million workers who will pay Social Security taxes in 2012, will pay higher taxes as a result of the increase in the taxable maximum.