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Summary

Current projections indicate that there will be no Social Security cost-of-living adjustment (COLA) in 2010, 2011, and 2012. Over the same period, total Medicare Part B program costs are expected to increase. Part B premiums, which are automatically deducted from Social Security checks, must cover 25% of projected Part B costs. The Social Security Act includes a provision that holds most Social Security beneficiaries harmless for increases in the Medicare Part B premium. Affected beneficiaries Part B premiums are reduced to ensure that their Social Security checks do not decline from one year to the next. In a typical year, the hold harmless provision affects a small fraction of beneficiaries and has a limited impact on program finances. However, in a scenario where Medicare Part B premiums increase but Social Security benefits do not, the effects of the hold harmless provision are larger and more complex. If there is no Social Security COLA, Medicare Part B premiums would be affected in two ways. For about three-quarters of Part B participants, the hold harmless provision would prevent their Part B premiums from increasing, and so their Social Security checks would remain flat. For the other one-quarter of beneficiaries, the hold harmless provision would not apply. These beneficiaries would shoulder the entire beneficiary share of the increase in Part B costs. In other words, their collective premium increase would be nearly four times greater than if there were no hold harmless provision. There are three groups of beneficiaries to whom the hold-harmless provision would not apply: low-income beneficiaries whose Part B premiums are paid by the Medicaid program (currently 17% to 18% of beneficiaries, expected to increase), high-income beneficiaries who are subject to income-related Part B premiums (about 5% of beneficiaries), and new enrollees (about 2% of beneficiaries). The substantial majority of those not held harmless are low income beneficiaries whose Part B premiums are paid by Medicaid. As a result, in the absence of any intervention by Congress, most of the cost of the increase in Part B premiums in 2010, 2011, and 2012 would be paid by the federal-state Medicaid program, not directly by beneficiaries. In the absence of a Social Security COLA, unless Part B premiums are increased substantially on those who are not held harmless, the Supplementary Medical Insurance trust fund, which finances Part B, is at risk of exhaustion.

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