The 2025 Social Security COLA is estimated to be around 2.5%. For many retirees, rising costs of Medicare premiums could offset much of this raise. If you wish to check out our detailed analysis of Social Security benefits and Medicare, you may go to 7 Reasons Why Rising Medicare Premiums Could Wipe Out Your Raise.
5. How Healthcare Inflation Outpaces Social Security Increases
Spending on prescription drugs administered in a physician’s office can drive up Medicare Part B premiums. These rising costs can impact the overall benefit of the Social Security COLA adjustment. According to a RAND report, prescription drug prices in the USA are much higher than in other countries, with US prices averaging 2.78 times than those in 33 other countries. As healthcare expenses continue to rise at a rate that often outpaces COLA increases, retirees may find their purchasing power diminished, making it increasingly difficult to cover essential living expenses.
4. Medicare Deductibles and Copays: Additional Costs to Consider
In addition to rising Medicare Part B premiums, retirees must also consider increasing Medicare Part D premiums, deductibles, and out-of-pocket costs. While the average monthly premium for Part D plans is around $55, this amount can vary depending on the specific plan and the retiree’s income level.
Medicare Part D also has a $2,000 out-of-pocket cap on prescription drug costs, which limits how much retirees pay for medications annually. However, this cap does not cover other rising costs, such as rising premiums and non-drug-related medical expenses. These increasing expenses can still offset the financial benefit provided by the Social Security COLA increase.
3. Higher-Income Retirees Will Feel the Biggest Impact Due to IRMAA
For individuals whose income is above a specific limit, the federal government adds an extra charge to their monthly premium. An estimated 8% of Medicare recipients pay higher premiums for parts B and D because of these Income-Related Monthly Adjustment Amounts (IRMAA). The IRMAA is calculated based on the modified adjusted gross income (MAGI) from the previous two year’s IRS tax return.
With Medicare premiums rising, those who have higher incomes are bound to see larger increases due to the IRMAA. This will in turn reduce the impact of the COLA increase they would have otherwise received.
2. The ‘Hold Harmless’ Provision May Not Protect Everyone
While the standard Part B premiums for 2024 were between $174.70 and $594 depending on one’s income, many people may pay less than this amount due to a “hold harmless” rule. This rule states that the part B premiums may not increase more than the Social Security COLA increase in any given year, preventing SS checks from declining year-over-year and capping part B premium increases to no more than the amount of COLA.
While the hold harmless rule aims to protect beneficiaries from having their Social Security checks reduced due to higher premiums, the rule only applies when the COLA increase is less than the Medicare premiums increase. Also, those who are not covered by this provision will likely have a reduction in their net income, since the increase in Medicare premiums may outstrip the COLA adjustment. Some individuals not covered by the provision include those who make payments for part B insurance directly to Medicare or those who have premiums paid by Medicaid.
1. Projected Medicare Part B Premium Increases for 2025
Even though the change hasn’t been announced yet, Medicare premiums are expected to increase in 2025. Earlier this year, the Medicare Trustees estimated that Part B premiums would be around $185 in 2025, a $10.30 increase from $174.70 in 2024. Since the Social Security COLA is expected to be around 2.5%, or $48, a portion of the COLA will seemingly be wiped out by this premium. Part B premiums are deducted directly from Social Security benefits, implying that a rise in these premiums can result in a negligible net increase in benefits for many retirees.
According to Mary Johnson, an independent Social Security and Medicare policy analyst, part B premiums and any voluntary withholdings from taxes are automatically deducted from Social Security checks. When these premiums grow at a faster rate than COLAs, the costs consume a larger portion of one’s monthly Social Security checks. Moreover, since Medicare costs are currently not included in the consumer price index used to calculate the COLA, it leads to a disparity.
“Ironically that index, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), does not survey retired adults aged 62 and older, the very people the Social Security COLA is supposed to protect”.
– Mary Johnson, independent Social Security and Medicare policy analyst.
To quote an example, if Social Security benefits increase by 2.5%, a retiree with a monthly benefit of $1,500 would see an increase of $37.50, making the new benefit $1,537.50. On the other hand, if Medicare premiums rise from $174.70 to $185, this increase is $10.30. If the premium increase is $10.30 and COLA is $37.50, the retiree’s net benefit increase is $27.20. The net gain is reduced because of the premium increase.
Check out our complete analysis here: Social Security COLA 2025: 7 Reasons Why Rising Medicare Premiums Could Wipe Out Your Raise Next Year
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