No COLA for 2016 Will Affect Medicare Premiums and Social Security Finances

Update, October 20:  We’ve updated this post based on new information from the Social Security actuaries.

The Social Security Administration’s announcement that there will be no cost-of-living adjustment (COLA) for Social Security beneficiaries next year due to declining prices raises important issues for both Medicare premiums and Social Security’s finances.  But so far, policymakers have focused only on the first of these questions.

Most Social Security beneficiaries enroll in Medicare Part B for doctor and outpatient services and have the premium deducted from their checks.  By law, in most cases, their net check can't shrink when Medicare premiums go up.  So, in years without a COLA, about 70 percent of Social Security beneficiaries are shielded from the premium increase.  

But under the law, this also means that the other 30 percent of beneficiaries — including people newly signing up for Medicare at 65 — will face premium increases of about 50 percent next year to cover the full cost of premium increases that otherwise would be spread across all beneficiaries.  Also, Part B deductibles will rise by about 50 percent next year for all beneficiaries.  Some in Congress have proposed shielding all beneficiaries from increases in Part B premiums and deductibles in 2016, which would cost about $10 billion.

A zero COLA also freezes the amount of Social Security’s “taxable maximum,” or the maximum wage on which workers and their employers pay Social Security payroll taxes (currently $118,500).  When average wages rise, the taxable maximum rises — except in years when there’s no COLA.  The taxable maximum would be $122,700 next year if it were allowed to rise as it normally does.  This quirk in the law will cost Social Security about $5 billion in revenue next year.

Lawmakers shouldn’t limit action to the Medicare front; they also should fix this Social Security provision.  The link between the COLA (which is based on prices) and the taxable maximum (which is based on wages) is unnecessary and costs Social Security money.  Congress should de-link the taxable maximum from the COLA and let it rise with wages as it normally does, regardless of whether there’s a COLA that year.