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Summary

Most Social Security beneficiaries pay Medicare premiums. Unless they qualify for low-income assistance, beneficiaries who participate in Medicare Part B (Supplementary Medical Insurance) or Part D (prescription drugs) must pay monthly premiums. Part B participants have premiums automatically deducted from their Social Security benefit checks. Part D participants may choose to have their premiums deducted from their Social Security checks. Medicare premiums are absorbing a growing share of Social Security benefits. To see the effect of growing premiums, consider a Social Security beneficiary who earned the average wage throughout his or her career (called a medium earner). If this retiree chose to participate in Part BŠas the vast majority of Social Security beneficiaries doŠthe standard Part B premium would have absorbed about 5% of the retiree™s benefits in 2000 and about 8% in 2009. The proportion of benefits needed to pay the Part B premium rose by about two-thirds over the past decade. The introduction of Medicare Part D adds to the premium expenses of beneficiaries who choose to participate; it also substantially reduces their out-of-pocket prescription drug costs. Part D premiums vary widely among plans; this report focuses on average premiums for standard coverage plans. The Medicare Trustees calculate that combined premiums for both Part B and Part D absorb about 12% of the average initial Social Security benefit check in 2009. Medicare™s trustees project that premiums for Parts B and D will grow at a faster rate than average Social Security benefits in the future, thus consuming a greater proportion of benefits over time. By 2078, the Medicare trustees project that as a proportion of the average Social Security benefit amount, premiums will more than double. In 2078, a retired worker receiving the average initial Social Security benefit amount is projected to need 22% of benefits to pay the Part B premium and 31% of initial benefits to pay combined Parts B and D premiums. The deduction of Medicare premiums affects beneficiaries differently, depending on their incomes and Social Security benefit amounts. Medicare premiums absorb a greater fraction of lower earners™ Social Security benefits than of higher earners™ benefits, because although benefit amounts are progressive, low earners tend to have lower dollar amounts of benefits. However, some low-income beneficiaries are eligible for subsidies that cover their Medicare premiums and other out-of-pocket costs. Other beneficiaries with low benefits may be protected by a hold harmless provision that prevents a beneficiary™s Social Security check from declining because of increases in the standard Part B premium. The Social Security Administration (SSA) has announced that there will be no Social Security cost-of-living adjustment (COLA) in 2010, and both SSA and the Congressional Budget Office predict that there will be no COLA in 2011. Over the same period, total Medicare Part B program costs are expected to increase. 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. For more information on this issue, please see CRS Report R40561, How Would Medicare Part B Premiums Be Affected If There Were No Social Security COLA?, by Jim Hahn and Alison Shelton. Finally, it is important to note that although Social Security beneficiaries are affected by rising health-care costs, the benefits of participating in Medicare are substantially greater than the costs.

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