The Impact of Medicare Premiums on Social Security Beneficiaries

^Pr^ep^ar^{ed f}^o^r^M^e^m^b^ers^an^d^Com^mⁱ^t^t^ees^of^C^ong^r^e^ss

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 to receive coverage. Part B
participants have premiums automatically deducted from their Social Security benefit checks.
Starting in 2007, higher-income Part B beneficiaries must pay higher Part B premiums. An
estimated 5% of Part B beneficiaries must pay income-related premiums in 2008. Part D
participants may choose to have their premiums deducted from their Social Security checks. The
amount of Part D premiums varies widely by plan. Beneficiaries must also pay other out-of-
pocket costs when they use Part B and Part D services.
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
B—as the vast majority of Social Security beneficiaries do—the standard Part B premium would
have absorbed about 5% of the retiree’s benefits in 1999 and about 8% in 2008. The proportion of
benefits needed to pay the standard Part B premium rose by almost 50% 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. If a medium earner chose to participate in both Part B and Part D, about 11% of
his or her Social Security benefits would be used for combined Parts B and D premiums in 2008.
Medicare’s trustees project that premiums for Parts B and D will grow at a faster rate than Social
Security benefits in the future, thus consuming a greater proportion of benefits over time. By
2080, the Medicare trustees project that as a proportion of Social Security benefits, premiums will
more than double. In 2080, a medium earner is projected to need 15% of his or her benefits to pay
the Part B premium and 23% of his or her 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 benefit amounts
are progressive. 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.
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.
This report will be updated as events warrant.

Introduc tion ..................................................................................................................................... 1
Backgr ound ..................................................................................................................................... 2
Social Security Benefits............................................................................................................2
Annual Cost-of-Living Adjustment (COLA)......................................................................2
Medicare Premiums..................................................................................................................3
Part B Premiums.................................................................................................................3
Part D Premiums.................................................................................................................4
Medicare Advantage (Part C)..............................................................................................5
Premium Subsidies for Low-Income Beneficiaries............................................................6
Relationship Between Social Security Benefits and Medicare Premiums......................................7
Growth in Social Security Benefits and Part B Premiums..................................................7
Hold Harmless Provision....................................................................................................9
Impact of Medicare Premiums on Social Security Beneficiaries...................................................11
Actual Impact, 1999-2008........................................................................................................11
Effect of Part B Premiums on Social Security Benefits.....................................................11
Effect of Part B Premium Increases on Social Security COLAs......................................12
Future Impact, 2009-2080.......................................................................................................13
Projected Effect of Part B Premiums on Social Security Benefits....................................14
Projected Effect of Part D Premiums on Social Security Benefits...................................15
Legislation in the 110^th Congress..................................................................................................17
Conclusion ..................................................................................................................................... 18
Figure 1. Annual Increase in Social Security Benefits and Standard Medicare Part B
Premiums, 1999-2008..................................................................................................................8
Figure 2. Approximate Thresholds for Hold Harmless Provision, 1999-2008..............................10
Figure 3. Percentage of Total Social Security Benefits Deducted for Standard Part B
Premiums, 1999-2008................................................................................................................12
Figure 4. Percentage of Social Security COLAs Absorbed by Standard Part B Increase,
1999-2008................................................................................................................................... 13
Figure 5. Percentage of Initial Social Security Benefits Deducted for Standard Medicare
Part B Premiums, 2009-2080.....................................................................................................15
Figure 6. Percentage of Initial Social Security Benefits Deducted for Standard Part B and
D Premiums, 2009-2080............................................................................................................17
Table 1. Part B Premiums, 2008......................................................................................................4

Author Contact Information..........................................................................................................19

Social Security and Medicare are large and important parts of America’s safety net. More than 40
million older and disabled individuals—about 1 in 7 Americans—are beneficiaries of both Social ¹
Security and Medicare. Social Security and Medicare account for a large amount of federal
spending. In 2007, spending on the two programs was over $1 trillion, more than one-third of the
federal budget and about 7% of gross domestic product (GDP), one measure of the size of the ²
U.S. economy.
Although Social Security and Medicare both play important roles in the well-being of older and
disabled Americans, the interactions between the two programs are rarely examined. These
interactions will become increasingly important as policymakers look for ways to slow the
growth in spending on Social Security and Medicare. This report focuses on how Medicare
premiums affect Social Security beneficiaries. Medicare premiums are rising faster than Social
Security benefits, consequently consuming an increasing share of benefits over time.
Rising Medicare premiums could have a large effect on Social Security beneficiaries, particularly
on those with low incomes and those who rely on Social Security as their primary source of
income. Some beneficiaries will be able to pay for rising health-care costs; others may have
limited resources. For example, among Americans aged 65 and older, about two-thirds receive
more than half of their income from Social Security, and more than one-third receive more than
90% of their income from Social Security. These beneficiaries may see a decline in their standard
of living as their Medicare premiums rise.
This report shows how the deduction of Medicare Part B and Part D premiums affects Social ³
Security beneficiaries. It describes how increases in Social Security benefits and Medicare
premiums are calculated under current law and explains the circumstances under which Social
Security beneficiaries are held harmless for increases in the standard Part B premium, as well as
the premium assistance available to low-income beneficiaries. It shows the growth in Social
Security benefits and Part B premiums in recent years and describes how rising Part B premiums
have affected Social Security beneficiaries, comparing the effects of premium deductions on
people with different levels of earnings. It also provides estimates of Social Security benefits and
Medicare Parts B and D premiums to 2080, using the Social Security and Medicare trustees’
intermediate projections, and describes how beneficiaries would be affected by projected
Medicare premium increases. Finally, it outlines current legislation that would affect the
relationship between Social Security benefits and Medicare premiums.

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Social Security provides retirement, disability, and survivors benefits to workers and their
families. People become insured for benefits by working in Social Security-covered employment ⁴
(i.e., by paying Social Security payroll taxes). Generally, people who qualify for retirement
benefits may receive reduced Social Security benefits as early as age 62 or full benefits at the full ⁵
retirement age. Those who qualify for disability or certain survivors benefits may receive them at
any age. The amount of a worker’s Social Security benefit is calculated by applying a progressive ⁶
benefit formula to his or her lifetime earnings, adjusted for wage growth. Historically, the
average Social Security benefit paid to new beneficiaries has increased at about the same rate as
average earnings.
After a person becomes eligible to receive Social Security benefits, his or her monthly benefit
amount is increased annually to maintain purchasing power over time. At the end of each year,
the Social Security Administration (SSA) announces the cost-of-living adjustment (COLA)
payable in January of the following year. The amount of the COLA is based on inflation as ⁷
measured by the Consumer Price Index—Urban Wage Earners and Clerical Workers (CPI-W).
In January 2008, Social Security benefits increased by 2.3% for current beneficiaries. This benefit
increase was based on the change in the CPI-W between October 2006 and September 2007. SSA ⁸
estimated that the COLA increased the average retired worker’s monthly benefit by $24.

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^Statis^tⁱ^c^s^{, by}^G^a^r^y^Sidor.
⁵^T^h^e^a^g^e^a^t^w^h^ic^{h w}^o^r^k^e^r^s^m^a^y^r^e^c^eⁱ^v^e^f^u^{ll r}^e^tir^e^m^eⁿ^{t be}^ne^f^its^is^rⁱ^sⁱ^ng^f^r^o^m^{65 (}^f^or^th^os^e^b^o^rⁿ^be^f^o^r^e¹⁹³⁸⁾^t^o^{67 (}^f^or
^thos^e^b^o^rⁿ^a^f^te^r¹⁹⁵⁹⁾^.
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^Statis^tⁱ^c^s^{, by}^G^a^r^y^Sidor.
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^cal^cu^l^a^t^e^d^{as t}^h^{e ch}^an^{ge i}ⁿ^t^h^{e C}^P^I-W^f^r^o^m^t^h^{e t}^hⁱ^r^d^q^u^a^rt^er^o^f^t^h^{e p}^rⁱ^o^r^cal^en^d^a^{r y}^{ear t}^o^t^h^{e t}^hⁱ^r^d^qu^art^e^{r o}^f^t^h^{e cu}^rren^t
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^Se^c^u^rity^{: The}^C^o^st-of-^Livⁱⁿ^g^A^d^ju^stme^{nt in J}^aⁿ^uary²⁰⁰⁸^,^by^G^a^r^y^Sidor^aⁿ^d^C^R^S^R^e^p^o^r^t^R^L³⁰⁰⁷^4,^The^C^o^ns^um^e^r
^P^rⁱ^{ce In}^d^{ex: A}^B^rⁱ^e^f^Overvi^ew^{, b}^y^Bria^{n W}^.^Ca^she^ll.
⁸^S^o^ci^al^S^ecu^ri^t^y^A^d^mⁱⁿⁱ^st^ratⁱ^oⁿ^,²⁰⁰⁸^S^o^cⁱ^al^Se^c^u^r^ity^C^h^an^ge^s^{, Oc}^t^obe^{r 2}⁰⁰⁷^{, a}^t^htt^p^://w^ww^.ss^a^.g^ov^/^p^re^ssoff^ic^e^/
^f^a^c^t^s^h^e^e^t^s^/^c^o^la^f^a^c^t^s^2008.^htm^.

Medicare is the federal health insurance program for people aged 65 and older and for certain
disabled people. Medicare is composed of four parts:
• Part A: Hospital Insurance (HI);
• Part B: Supplementary Medical Insurance (SMI), which covers physician
services and other outpatient expenses;
• Part C: Medicare Advantage (MA), which covers the same services as Parts A
and B through private health insurance plans; and
• Part D: covers prescription drugs through private plans.
Participation in Part A is required for Social Security beneficiaries aged 65 and older and for ⁹
those who have received disability benefits for more than 24 months. Part A beneficiaries may ¹⁰
choose to participate in Parts B, C, and D.
Medicare is funded through a combination of payroll taxes, general revenues, and beneficiary
premiums. Medicare Part A is funded primarily through the payroll taxes of current workers and ¹¹
their employers, which are credited to the HI trust fund. Parts B and D are financed through a
combination of beneficiary premiums and federal general revenues, which are credited to the SMI
trust fund. Part C is financed through the HI and SMI trust funds; Part C participants must pay the ¹²
Part B premium. Because this report focuses on the payment of Medicare premiums, the
analysis herein primarily relates to Parts B and D.
At the end of each year, the Centers for Medicare and Medicaid Services (CMS) announce Part B
premiums for the next year. The Balanced Budget Act of 1997 permanently set the standard Part
B premium to cover 25% of projected per capita Part B program costs for beneficiaries aged 65 ¹³
and older. If projected Part B costs increase or decrease, the premium rises or falls

⁹^P^e^o^p^l^{e w}^h^o^receiv^e^So^{cial Secu}^ri^ty^b^eⁿ^e^f^{its th}^{at co}ⁿ^f^{er e}^lig^ib^ility^fo^r^P^a^{rt A}^{(i.e., retirem}^en^{t b}^eⁿ^e^f^{its f}^o^{r th}^o^s^{e ag}^ed
^{65 a}ⁿ^d^olde^{r a}^nd^disa^bili^ty^be^ne^fⁱ^{ts a}^f^te^{r 24 m}^onths^{) m}^a^y^{not w}^aⁱ^v^e^P^a^{rt A}^eⁿ^title^m^e^{nt. (Soc}^ia^l^Se^c^u^rity
^A^d^mⁱ^nis^t^r^a^tion,^Pr^og^r^a^m^O^p^e^r^a^tⁱ^ons^Ma^nua^{l Sy}^s^t^em^{, H}^I⁰⁰⁸⁰¹^.0⁰²^{, a}^t^https^:^//s⁰^44a⁹⁰^.s^s^a^.g^ov^/a^pps^10/^pom^s^.^ns^f^/^lnx^/
⁰⁶⁰⁰⁸⁰¹⁰⁰^2!^opeⁿ^doc^um^eⁿ^t.)
¹⁰^Of^P^a^rt^A^b^eⁿ^e^fⁱ^ci^ari^e^s,^ro^u^g^h^l^y⁹⁴^%^{are en}^ro^l^l^e^dⁱⁿ^P^a^rt^B^,^an^{d ab}^o^u^t²⁰^{% are en}^ro^l^l^e^dⁱⁿ^P^a^rt^C.^Iⁿ²⁰⁰⁷^,^abo^u^t
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^P^a^r^t^D^plaⁿ^s^or^ha^d^pr^e^s^c^r^iptioⁿ^d^r^ug^c^o^v^e^r^a^g^e^thr^oug^{h the}ⁱ^r^P^a^r^t^C^plaⁿ^s^,^a^{nd a}ⁿ^a^d^diti^ona^l^34%^w^e^r^e^eⁿ^r^o^lle^dⁱⁿ^ot^he^r
^he^a^{lth i}ⁿ^s^u^r^a^nc^e^p^l^aⁿ^s^tha^t^w^e^r^e^subs^id^iz^e^d^by^P^a^r^t^D^.⁽^C^R^S^R^e^p^o^r^t^R^L³⁴²⁸^0,^Medⁱ^ca^{re P}^a^rt^{D P}^r^es^cri^p^tⁱ^o^{n Dru}^g
^Be^ne^{fit: A Prime}^r^,^by^Je^nnif^e^{r O’}^Sulliv^aⁿ^.)
¹¹^A^{bout 9}⁹^%^of^Me^dic^a^r^e^be^ne^fⁱ^cⁱ^a^r^ie^s^qua^lif^y^f^o^r^pr^e^m^iu^m^-^f^r^e^e^P^a^r^t^A^c^o^v^e^r^a^g^e^,^w^h^ic^{h the}^y^e^a^r^{n if}^the^y⁽^o^r^theⁱ^r
^s^pous^e^s⁾^ha^v^e^w^o^r^k^e^d^a^t^le^a^s^{t 10}^y^e^a^r^s^{in Me}^dic^a^r^e^-^c^o^v^e^r^e^{d em}^ploy^m^e^{nt. I}^ndivⁱ^d^u^a^l^s^w^ithou^{t s}^u^f^fⁱ^cⁱ^eⁿ^{t w}^o^r^k^his^t^or^y
^w^{ho a}^r^e^othe^r^w^is^e^e^lig^ible^f^o^r^Me^dic^a^r^e^m^a^y^pa^r^tic^ipa^t^e^{in the}^pr^og^r^a^m^if^they^pay^m^onthly^P^a^r^t^A^pr^em^ium^s^.
¹²^T^h^e^la^w^re^quire^{s tha}^t^P^a^{rt C pa}^rti^c^ipaⁿ^{ts pa}^y^the^P^a^{rt B}^p^r^emⁱ^u^m^.^S^o^m^e^P^a^rt^C^p^l^an^{s sub}^sⁱ^dⁱ^{ze t}^h^{e pre}^mⁱ^u^m^f^o^{r t}^h^ei^r
^eⁿ^rolle^e^s^{; ot}^he^{rs re}^qu^ire^tha^t^eⁿ^ro^lle^e^s^pa^y^the^f^u^ll^P^a^{rt B}^pre^m^iu^m^{plus a}ⁿ^a^d^d^itio^na^{l pre}^m^ium^dire^c^tly^{to the}^plaⁿ
^s^pons^or^.
¹³^Dⁱ^s^a^ble^d^Me^dⁱ^c^a^r^e^be^ne^fⁱ^cⁱ^a^r^ie^s^unde^r^a^g^e⁶⁵^pa^y^the^s^a^m^e^pr^em^ium^am^{ount a}^s^th^os^e^a^g^e^d⁶⁵^or^ol^de^r^,^th^oug^h^theⁱ^r
^p^e^{r cap}ⁱ^t^a^P^a^rt^{B c}^o^st^{s are h}ⁱ^gh^er.

proportionately. Starting in 2007, higher-income beneficiaries pay higher Part B premiums.¹⁴ An ¹⁵
estimated 5% of Part B beneficiaries must pay income-related premiums in 2008. Unless they
qualify for low-income assistance, Part B participants must pay monthly premiums; they must
also pay other out-of-pocket costs when they use Part B services.
In January 2008, the standard Part B premium rose to $96.40 per month, an increase of 3.1% over
2007. The premium increase was necessary to cover the rising cost of Part B services and to build
up trust fund reserves. In 2008, individuals whose modified adjusted gross income (AGI) exceeds
$82,000, and couples whose modified AGI exceeds $164,000, are subject to higher premium ¹⁶
amounts, as shown in Table 1 below. The analysis in this report focuses on the standard Part B
premium, which is paid by most beneficiaries. In addition to premiums, Part B beneficiaries must
also pay other out-of-pocket costs when they use services. The annual deductible for Part B
services is $135 in 2008. After the annual deductible is met, beneficiaries are responsible for
coinsurance costs, which are generally 20% of Medicare-approved Part B expenses.
Table 1. Part B Premiums, 2008
^{Modified Adjusted Gross I}ⁿ^c^{ome (AGI)}
^Premium
^Single^Couple
^$82,0⁰⁰^{or less}^$16^4,00^{0 or less}^$96.4⁰
^$82,0^01-$¹⁰^2,0^{00 $16}^4,00^1-$2^04,⁰⁰⁰^$12^2.20
^$10^2,00^1-$1^53,⁰⁰^{0 $20}^4,00^1-$3^06,⁰⁰⁰^$16^0.90
^$15^3,00^1-$2^05,⁰⁰^{0 $30}^6,00^1-$4^10,⁰⁰⁰^$19^9.70
^{More tha}^{n $}²⁰^5,00⁰^{More tha}^{n $}⁴¹^0,00⁰^$23^8.40
^Source:^{Social Security Administration,}^{Medicare Part B Premiums:}^{Important Information For People}^N^{ewly Eligible}
^{For Medicare 2008}^{, December 20}^{07, at htt}^{p://www.ssa.gov/pubs/}¹⁰^162.^html.
^Note:^{For more, see CRS}^{Report RL32}⁵⁸^2,^{Medicare: Part B Premiums}^{, by}^Jen^{nifer O’Sullivan.}
Medicare Part D was established in the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003 (MMA, P.L. 108-173) and began covering beneficiaries’ prescription ¹⁷
drugs through private plans in January 2006. To participate in Part D, qualified individuals must
enroll in a participating prescription drug plan. Unless they qualify for low-income assistance,

¹⁴^T^h^e^Me^dic^a^r^e^P^r^e^s^c^r^ipti^on^D^r^ug^,^I^m^pr^ov^em^eⁿ^{t, a}^{nd Mo}^de^rⁿ^iz^a^tⁱ^o^{n A}^c^{t of}²⁰⁰³⁽^P^.L^{. 1}^08-¹⁷³⁾ⁱⁿ^c^r^e^a^s^e^d^the^P^a^r^t^B
^p^r^emⁱ^u^m^p^e^rcen^t^a^ge^f^o^{r h}ⁱ^gh^-iⁿ^c^o^m^{e en}^ro^l^l^ees;^t^h^{e Def}ⁱ^ci^t^Red^u^c^tⁱ^oⁿ^A^c^t^o^f²⁰⁰⁵⁽^P^.^L^.¹⁰⁹^-¹⁷¹⁾^accel^erat^ed^t^h^e
^pha^s^e^-ⁱⁿ^pe^rⁱ^o^d^f^o^r^s^u^c^h^pr^e^m^ium^s^.
¹⁵^SSA^,^M^e^dic^a^r^e^Par^t^B^Pr^e^m^ium^s^:^I^m^por^t^ant^Iⁿ^f^o^r^m^ati^on^For^Pe^o^p^le^N^e^w^l^y^Elig^ible^F^o^r^M^e^dic^a^r^e²⁰⁰⁸^,^Decem^b^e^r
²⁰⁰^{7, a}^t^htt^p^://w^ww^.ss^a^.g^ov^/^p^u^b^s^/¹⁰¹⁶^2.h^t^m^l^.
¹⁶^For^m^o^r^e^inf^o^r^m^a^{tion, s}^e^e^C^R^S^R^e^por^{t R}^L³²⁵⁸^2,^Medⁱ^ca^{re: P}^a^rt^{B Premiu}^ms^,^by^Je^nnif^e^{r O’Sulliv}^aⁿ^.
¹⁷^Se^e^C^R^S^R^e^por^{t R}^L³¹⁹⁶⁶^,^Overvi^{ew o}^f^t^h^{e Med}ⁱ^ca^{re P}^r^escri^p^tⁱ^on^Dru^g^,^Imp^r^o^vemen^t^,^an^d^Mod^e^rnⁱ^z^a^tⁱ^o^{n A}^c^t^o^f
²⁰⁰³^,^by^Je^nnif^e^{r O'}^Sulliv^aⁿ^e^t^a^l^{., a}ⁿ^d^{CRS Re}^p^o^{rt RL}³¹⁵²^5,^Beⁿ^e^fic^iar^y^C^o^s^t^-^S^harⁱ^{ng U}^nde^r^t^h^e^M^e^dic^a^r^e
^Pre^s^c^r^{iption Dru}^g^Be^ne^fit^,^by^Jⁱ^m^H^a^hn.

Part D participants must pay monthly premiums; they must also pay other out-of-pocket costs
when they use Part D services.
MMA established guidelines for standard Part D coverage, including specific deductible and
coinsurance amounts and a formula for calculating average premiums. Individual prescription
drug plans are also allowed to offer alternative coverage that has at least actuarially equivalent
benefits. In other words, alternative coverage plans must pay, on average, equal or greater
benefits per person than standard coverage plans. Alternative coverage plans may charge higher ¹⁸
or lower premiums, deductibles, and coinsurance than standard coverage plans. This report
focuses on beneficiaries’ premiums for standard Part D coverage, which vary by plan. On
average, a beneficiary’s premium covers 25.5% of the value of a standard coverage plan and the
federal government pays for the remaining 74.5%.
The average premium for standard Part D coverage is $27.93 in 2008. The annual deductible for
standard coverage is $275 in 2008. After meeting the deductible, beneficiaries pay 25%
coinsurance costs for drug costs up to $2,510, all of their drug costs between $2,510 and $5,726, ¹⁹
and about 5% of drug costs above $5,726.
Beneficiaries who are entitled to Medicare Part A and enrolled in Part B may choose to enroll in a
private health insurance plan through Part C, also known as Medicare Advantage (MA), which
provides health-care coverage in lieu of traditional Medicare. In 2007, about 20% of Medicare ²⁰
beneficiaries were enrolled in Part C, mostly in managed care plans. Medicare Advantage plans
are generally required to offer the same services as Medicare Parts A and B. MA managed care
organizations must also offer at least one Medicare Advantage-prescription drug plan (MA-PD)
that includes drug coverage at least equivalent to standard coverage in Part D plans. ²¹
(Beneficiaries enrolled in MA managed care plans may not enroll in a stand-alone Part D plan.)
Medicare Advantage participants’ total premium amounts may be higher or lower than the Part B
premium. Although the law requires that MA participants pay the Part B premium, some plans

¹⁸^For^e^x^a^m^ple^,^{in 2}⁰⁰⁸^pr^e^m^ium^s^f^o^r^s^t^a^nd-^a^l^one^P^a^r^t^D^plaⁿ^s^r^a^ng^e^d^f^r^om^$9.80^to^$¹⁰⁷^.5⁰^pe^r^m^{onth. (}^K^aⁱ^s^e^r
^Fa^mⁱ^l^y^Founda^ti^on,^M^e^dic^a^r^e^Pa^r^t^D²⁰⁰⁸^D^a^t^a^S^pot^lig^ht:^Pr^e^m^iu^m^s^{, Nov}^e^m^b^e^r²⁰⁰^{7, a}^t^htt^p^://w^ww^.kff^.org^/
^m^e^dic^a^r^e^/^upl^oa^d/⁷⁷⁰⁶^.p^df^.)
¹⁹^T^h^e^m^a^jor^ity^of^plaⁿ^s^of^f^e^r^e^{d to be}^ne^fⁱ^cⁱ^a^r^ie^s^{in 20}^{06 w}^e^r^e^a^lte^rⁿ^a^tiv^e^c^o^v^e^r^a^g^e^plaⁿ^s^.^Ma^ny^of^the^s^e^plaⁿ^sⁱⁿ^c^l^ude
^tie^r^e^{d c}^o^s^t^-^s^ha^rⁱ^ng^,^un^de^r^w^h^ic^{h c}^o^s^t^s^a^r^e^low^e^r^f^o^r^g^e^ne^rⁱ^c^dr^ug^s^and^hig^h^e^r^f^o^r^br^aⁿ^d-^na^m^e^dr^ug^s^.
²⁰^K^a^is^e^r^Famⁱ^l^y^Foun^da^tio^n,^F^a^c^t^She^e^t^:^M^e^dic^a^r^e^Adv^ant^age^{, J}^une²⁰^07,^a^t^h^ttp:/^/w^w^w^.kf^f^.or^g^/^m^e^dⁱ^c^a^r^e^/^upl^oa^d/
²⁰⁵^2-^10.^pdf^.
²¹^MA^pr^ov^ide^r^s^of^no^nm^aⁿ^a^g^e^d^c^a^r^e^plaⁿ^s⁽ⁱ^.e^.^,^pr^iv^a^t^e^f^e^e^-^f^o^r^-^s^e^r^vⁱ^c^e^[^P^F^F^S^]^plaⁿ^s^aⁿ^{d m}^e^dic^a^l^s^a^vⁱ^ng^s^a^c^c^ounts
^[^M^S^A^s]^{) are}^not^re^qu^ire^d^t^o^of^f^e^r^pre^s^c^r^iptio^{n d}^r^ug^c^o^v^e^ra^g^e^{. D}^r^ug^c^o^v^e^ra^ge^is^opti^ona^{l f}^o^r^PFFS^pro^vⁱ^de^rs^{; PFFS}^plaⁿ
^eⁿ^rolle^e^s^w^ithout^dr^ug^c^o^v^e^ra^g^e^are^pe^rm^itte^{d to e}ⁿ^ro^{ll i}ⁿ^a^s^t^aⁿ^d-a^l^one^P^a^{rt D}^plaⁿ^{. MSA}^s^m^a^y^{not o}^f^f^e^{r drug}
^co^verag^e^.

subsidize the premium for their enrollees. Other plans require that enrollees pay the full Part B ²²
premium plus an additional premium directly to the plan sponsor.
The analysis in this report focuses on Social Security beneficiaries who pay Medicare premiums.
However, low-income individuals (including MA participants) may qualify for low-income ²³
subsidies, which cover all or part of their Part B and Part D premiums. About one in five of
Medicare beneficiaries receive full Part B subsidies.
To qualify for subsidies, beneficiaries must have limited income and assets. Beneficiaries may
qualify for full Part B premium subsidies if they have incomes of less than 135% of poverty and
assets of less than $4,000 for an individual or $6,000 for a couple. Beneficiaries may qualify for
full or partial Part D premium subsidies if they have incomes of less than 150% of poverty and
assets of less than $11,990 for an individual and $23,970 for a couple in 2008.
Some beneficiaries who qualify for premium subsidies do not apply for them. For example, CMS
has estimated that more than one-fourth of Medicare beneficiaries (roughly 11 million) qualify for ²⁴
full Part B subsidies. In 2005, about two-thirds of qualifying individuals (7.5 million) received ²⁵
Part B subsidies. CMS has also estimated that about a third of Medicare beneficiaries (roughly
14 million) qualify for full or partial Part D subsidies. In 2007, about 9.1 million beneficiaries
received Part D subsidies, and an additional million low-income beneficiaries receive ²⁶
comprehensive drug coverage for little or no cost. However, 3.3 million individuals eligible for
subsidies had neither signed up for Part D nor had coverage through another source.

²²^A^s^of^2006,^the^m^a^jor^ity⁽^55%⁾^of^M^A^pa^r^tic^ipaⁿ^ts^’^t^o^ta^{l pr}^e^m^ium^s^w^e^r^e^e^qua^{l to t}^h^e^P^a^r^t^B^pr^e^m^ium^am^{ount, the}ⁿ
^$88^.5^{0 pe}^r^m^ont^{h. A}^b^o^u^{t 4}²^%^of^MA^pa^r^tic^ipaⁿ^ts^paⁱ^d^hⁱ^g^h^e^r^pr^e^m^ium^s^{, a}^{nd a}^b^o^u^t^3%^pa^id^low^e^r^pr^em^ium^s^{. O}ⁿ
^a^v^e^r^ag^e^,^M^A^pa^r^tic^ipaⁿ^ts^’^t^o^ta^{l m}^ont^hly^pr^em^ium^s^w^e^r^e^a^{bout $}²⁶^m^o^r^e^thaⁿ^the^P^a^r^t^B^pr^e^m^ium^.⁽^A^A^R^P^Pub^lic
^Polic^y^Institute^,²⁰^{06 M}^e^dic^a^re^A^d^v^ant^age^Be^ne^{fits a}ⁿ^d^Pre^m^iums,^by^Ma^r^s^ha^G^o^{ld, Ma}^rⁱ^a^C^u^p^p^le^s^H^uds^oⁿ^{, a}ⁿ^{d Sa}^r^a^h
^D^a^vⁱ^s^,^N^o^v^e^m^b^e^r^2006,^a^t^ht^tp:/^/a^s^s^e^ts^.a^a^r^p.or^g^/^r^g^c^eⁿ^te^r^/^he^a^lth/²⁰⁰^6_2^3_m^e^d^ic^a^r^e^.^pdf^.)
²³^For^m^o^r^e^inf^o^r^m^a^{tion o}ⁿ^s^u^bs^idi^e^s^f^o^r^low^-^inc^o^m^e^Me^dic^a^r^e^be^ne^fⁱ^cⁱ^a^r^ies^,^s^e^e^C^R^S^R^e^por^{t R}^L³²⁵⁸^2,^Medⁱ^ca^re:
^{Part B}^Pre^m^iums^{, an}^d^{CRS Rep}^o^r^{t RL}³²⁹⁰²^,^M^e^dic^a^re^Pre^s^c^r^{iption Dru}^g^Be^ne^{fit: L}^o^w-Inc^o^me^Pr^ov^isions^{, bo}^t^h^b^y
^Je^nnif^e^{r O’Sulliv}^aⁿ^.
²⁴^Cen^t^{ers f}^o^{r M}^e^dⁱ^{care an}^d^M^e^dⁱ^c^aⁱ^d^S^e^rvi^ces,^{Over 3}⁸^M^illioⁿ^Peo^p^{le with}^M^e^dⁱ^ca^{re No}^{w Receivin}^g^Prescrip^tioⁿ
^D^r^{ug C}^o^v^e^r^a^g^e^{, J}^u^ne¹⁴^,²⁰^06,^a^t^htt^p^://^hhs^.g^ov^/ⁿ^e^w^s^/^pr^e^s^s^/²⁰⁰^6pr^e^s^/200⁶⁰⁶¹^4.h^t^m^l^.
²⁵^Kai^s^{er Co}^mmⁱ^ssi^oⁿ^on^M^e^di^cai^{d an}^d^t^h^{e Un}ⁱⁿ^su^red,^Du^{al El}^igi^b^le^{s: M}^e^dic^a^{id’s R}^o^le^for^Low-Iⁿ^c^o^me^M^e^dic^a^re
^Be^ne^fic^iarie^s^{, Fe}^br^ua^ry^2006,^a^t^h^ttp://w^w^w^.kff^.org^/^m^e^d^ic^aⁱ^{d/ u}^p^lo^a^d^/D^ua^l-Elig^ible^s^-^Me^dⁱ^c^aⁱ^d-s^-^Ro^le^-f^or-L^o^w^-
^In^co^m^e^-M^edⁱ^care-Ben^e^fⁱ^ci^ari^e^s-F^e^b^-²⁰⁰⁶^.^p^d^f^.^(Hereaf^t^e^{r ci}^t^e^d^as^Kai^s^er,^D^u^a^l^E^l^ig^ib^l^e^s^.)
²⁶^Cen^t^{ers f}^o^{r M}^e^dⁱ^{care an}^d^M^e^dⁱ^c^aⁱ^d^S^e^rvi^ces,^M^e^dic^a^r^e^D^r^{ug Pl}^aⁿ^s^Str^oⁿ^g^aⁿ^d^G^r^owⁱⁿ^g^{, J}^aⁿ^u^a^r^y^30,²⁰⁰⁷^{, a}^v^a^ila^ble
^a^t^http^://w^ww^.^c^m^s^.hhs.g^ov^/a^pps/m^e^d^ia^/pre^ss/
^r^e^le^a^s^e^.^a^s^p?^C^ounte^r⁼²⁰⁷^9&^intN^u^m^P^e^r^P^a^g^e⁼^10&^c^h^e^c^k^D^a^te=^&^c^h^ec^k^K^ey⁼^&^s^r^c^h^Ty^pe=¹^&^num^D^a^y^s⁼³⁵⁰^0&^s^r^c^h^O^p^t=⁰
^&srch^D^at^a=^&ke^y^wo^rd^T^y^p^e⁼^A^l^l^&ch^k^Ne^w^s^T^y^p^e=1^%2^C+2^%²^C⁺³^%2^C+4^%²^C⁺⁵^&iⁿ^t^P^a^ge=&sh^owA^l^l⁼^&p^Year=^&^y^e^a
^r=&d^esc=^f^a^l^s^e&cb^o^O^rd^er=d^at^e.

Ultimately, everyone who is eligible for Social Security retirement or disability benefits qualifies ²⁷²⁸
for Medicare. Most people who participate in both programs pay Medicare premiums. By law,
the Medicare Part B premium is automatically deducted from the Social Security benefits of those ²⁹
enrolled in Part B (including MA and MA-PD participants). Medicare Part D participants may
choose to have their Part D premiums deducted from their benefits or to pay them directly to their
prescription drug plan sponsors.
Historically, the growth in Medicare Part B premiums has greatly exceeded the growth in Social
Security benefits. Over the past decade, Social Security’s annual COLA resulted in a cumulative ³⁰
benefit increase of about 26%; average worker benefits have increased by about 34%. At the
same time, standard Part B premiums have more than doubled, from $45.50 in 1999 to $96.40 in
2008. By law, all Part B premiums are set as a proportion of projected Part B program costs. Part
B costs—like all health-care costs—have been rising dramatically. This cost growth is driven by
many factors, including increasing life expectancy, new medical technology, program expansion,
increases in the earnings of health professionals, and other medical price growth (which has been
higher than overall inflation).
The cumulative growth in standard Part B premiums has been dramatic, but annual changes have
been somewhat erratic. During the past 10 years, annual Part B premium increases have ranged
from 0% to more than 17%. Social Security COLAs, meanwhile, have ranged from 1.3% to 4.1%.
Figure 1 shows the annual rates of increase in Medicare premiums and Social Security benefits
from 1999 to 2008.

²⁷^P^e^o^p^l^{e ag}^ed⁶⁵^an^d^o^l^d^e^{r w}^h^o^q^u^alify^f^o^{r So}^{cial Secu}^rity^b^eⁿ^e^f^its^an^d^p^e^o^p^l^e^o^f^an^y^a^g^e^w^h^o^receiv^e^dⁱ^sab^ility
^be^ne^f^{its (a}^f^t^e^r^a^tw^o-^y^e^a^r^w^a^iting^pe^riod)^a^r^e^eⁿ^title^d^to^P^a^{rt A}^a^nd^a^r^e^a^l^{so e}^lig^ible^{to e}ⁿ^rollⁱⁿ^P^a^rt^{B, in a}^priv^a^t^e
^he^a^{lth i}ⁿ^s^u^r^a^nc^e^p^l^aⁿ^t^h^r^o^ug^h^P^a^r^t^C^,^aⁿ^d/or^{in a}^pr^iv^a^t^e^pr^e^s^c^r^ipti^oⁿ^dr^ug^plaⁿ^thr^oug^h^P^a^r^t^D^.
²⁸^S^o^m^e^b^eⁿ^e^fⁱ^ci^ari^e^{s d}^oⁿ^o^t^p^a^y^M^e^dⁱ^{care p}^r^emⁱ^u^m^s^,^ei^t^h^{er b}^ecau^{se t}^h^ey^rec^eⁱ^v^{e l}^o^w^-ⁱⁿ^co^m^e^a^ssi^st^an^{ce o}^r^b^ecau^se
^the^y^c^hoos^e^not^{to e}ⁿ^r^o^llⁱⁿ^Me^di^c^a^r^e^P^a^r^t^B^or^P^a^r^t^D^.
²⁹^{42 U}^.^S.C^.^§¹⁸⁴⁰⁽^a⁾⁽¹⁾^.^P^a^r^t^B^pr^em^ium^s^a^r^e^a^l^s^o^de^duc^te^{d f}^r^om^R^a^ilr^oa^{d R}^e^tir^e^m^eⁿ^{t be}^ne^f^its⁽^{42 U}^.^S.C^.^§
¹⁸⁴⁰⁽^b)⁽¹⁾⁾^.
³⁰^T^h^{e COL}^Aⁱⁿ^creas^{es t}^h^{e b}^eⁿ^e^fⁱ^t^s^p^aⁱ^d^t^o^cu^rren^t^b^eⁿ^e^fⁱ^ci^ari^e^s.^In^c^oⁿ^t^rast^,^{average S}^o^ci^al^S^ecu^ri^t^y^b^eⁿ^e^fⁱ^t^s^(t^h^o^s^e
^p^aⁱ^d^t^oⁿ^e^w^an^d^cu^rren^t^b^eⁿ^e^fⁱ^ci^a^rⁱ^e^{s) h}^a^{ve ri}^sen^at^{a f}^a^st^{er rat}^e^t^h^an^t^h^{e a}ⁿ^nu^al^COL^A^,^b^ecau^{se t}^h^{e fo}^rm^u^l^{a f}^o^r
^c^a^l^c^u^la^ting^initia^l^Socⁱ^a^l^Se^c^u^rity^be^ne^f^{its is link}^e^{d to}^wa^g^e^g^r^ow^{th, w}^h^e^r^e^a^s^the^C^O^LA^is^ba^s^e^{d on}^pri^c^e^g^r^o^w^th.
^G^eⁿ^e^r^a^l^l^y^,^wage^{s ri}^{se fast}^{er t}^h^an^p^rⁱ^ces.

Figure 1. Annual Increase in Social Security Benefits and Standard Medicare Part B
Premiums, 1999-2008
^Source:^{Congressional Researc}^h^{Service calculations, based on figures f}^{rom the}^{2007 Medicare Trustees R}^eport
^{and the}^{2007 Social Security Trustees Rep}^ort^.
^Note:^{There was no increase i}ⁿ^{the Part B p}^{remium in}²⁰⁰^0.

A hold harmless provision reduces the Part B premium for beneficiaries whose Social Security ³¹
COLAs are not sufficient to cover the standard Part B premium increase. If, in a given year, the
increase in the standard Part B premium
would cause a beneficiary’s Social Security Example of Hold Harmless Provision
check to be less than it was the year before, ^{To see the effect}^{of the}^{hold har}^{mless provision,}
the premium is reduced to ensure that the ^{consider an individual, Maria, who retires in 2}⁰⁰⁵^{with a}^{monthly Social Security benefit of}^$2^{00. In}²⁰⁰^{5, Maria}
nominal amount of the individual’s Social ³²^{would receive a bene}^{fit check}^of^$12^{1. (Maria’s 20}⁰⁵
Security check stays the same. (See the text ^{check is e}^{qual to her}^be^{nefit amount of}^$2^{00, minu}^{s the}
box below for an example.) However, high-²⁰⁰^{5 Part B}^premiu^{m of $}^78.2^{0, rounded down to the}
income individuals who must pay income-^{nearest dollar.)}
related Part B premiums are not subject to the ^{In 2}⁰⁰^{6, the in}^{flation rate used to}^{calculate the Social}
hold harmless provision. This means that for ^{Security COLA was}^{4.1%. Th}^us,^{Maria’s COLA for 2}⁰⁰⁶
these high-income beneficiaries, Social ^{would have bee}^{n $}^{8.20 (}^{4.1% tim}^{es $2}^{00). The Part B}
Security checks can be reduced from one year ^premium^{for 2}⁰⁰⁶^was^$8^{8.50 ($}^10.3^{0 more t}^{han in}²⁰⁰^{5). If t}^he^entire^{Part B pr}^emiu^{m were deducted,}
to the next as a result of an increase in the Part ^{Maria’s check would fall from $}¹^{21 in}²⁰⁰⁵^{to $1}^{19 in}
B premium. ²⁰⁰^{6. (Maria’s 2}⁰⁰⁶^che^{ck is eq}^ua^{l to her 2}⁰⁰⁵^be^nefit
^{amount of $}²⁰^{0, plus t}^{he CO}^LA^{of $8.20, min}^{us t}^he
SSA determines which beneficiaries will be ²⁰⁰^{6 Part B}^premiu^{m of $}^88.5^{0, rounded down to the}
held harmless each year. In some cases, a ^{nearest dollar.)}
beneficiary may be held harmless one year but ^{Because Ma}^{ria’s 200}⁶^bene^{fit che}^{ck would be less tha}ⁿ
not the next. In other cases, a beneficiary will ^her²⁰⁰⁵^bene^{fit check (a}^result^{of the increas}^{e in th}^e^{Part B premium), s}^{he would be}^h^{eld harmless. In othe}^r
be held harmless entirely because his or her ^{words, Maria’s Part B premium w}^{ould be reduced}^{by $}^2,
premium was reduced in a previous year. The ^{so that the}^{nominal amount of}^he^{r monthly Social}
cumulative effect of the hold harmless ^{Security check}^{for 2}⁰⁰⁶^{would st}^{ay the same}^{as it was in}
provision can produce substantial savings for ²⁰⁰^{5 ($}¹²^1).

individuals with low benefits.
A beneficiary is not held harmless if the increase in his or her Part D premium (or the combined
increase in Part B and Part D premiums) causes his or her Social Security check to decline. In
other words, a person’s Social Security check may decrease from one year to the next as a result
of Part D premium increases.
Whether a beneficiary is held harmless depends on the amount of the standard Part B premium
increase relative to the amount of his or her Social Security COLA in a given year. An
individual’s Social Security COLA is determined by multiplying his or her benefit amount by the
inflation rate (i.e., the CPI-W). Part B premiums are determined by projected Part B program
costs. Thus, the number of people held harmless can vary widely from year to year, depending on
annual inflation rates and projected Part B costs. For example, about 1.8 million Part B

³¹^{42 U}^.^S.C^.^§¹⁸³⁹⁽^f⁾^{. T}^h^e^h^o^ld^ha^r^m^les^s^pr^ov^is^{ion w}^a^s^fⁱ^r^s^{t i}^m^plem^eⁿ^te^{d in}^J^a^nua^r^y¹⁹⁸^7.
³²^T^o^b^e^h^e^l^d^h^a^rm^l^e^{ss i}ⁿ^{a gi}^ven^year,^{a b}^eⁿ^e^fⁱ^ci^ar^y^m^u^st^h^a^{ve h}^a^d^P^a^rt^B^p^r^emⁱ^u^m^s^d^e^d^u^c^t^e^d^f^r^o^m^b^o^t^h^t^h^{e Decem}^b^e^r
^c^h^e^c^k^of^the^pr^ior^y^e^a^r^a^{nd the}^J^a^nua^r^y^c^h^e^c^k^o^f^the^c^u^r^r^e^{nt y}^e^a^r^{. C}^h^aⁿ^g^e^s^{in a}^be^ne^fⁱ^cⁱ^a^r^y^’^s^be^ne^f^{it am}^{ount (}^o^the^r^thaⁿ
^the^C^O^LA⁾^{do n}^o^{t a}^f^f^e^c^t^w^h^e^t^he^r^the^be^ne^fⁱ^cⁱ^a^r^y^is^he^{ld ha}^r^m^le^s^s^.^I^f^a^be^ne^fⁱ^cⁱ^a^r^y^’^s^be^nef^{it am}^{ount c}^h^aⁿ^g^e^s^durⁱⁿ^g^a
^{year i}ⁿ^w^hⁱ^c^h^h^e^o^r^s^h^{e i}^s^h^e^l^d^h^a^rm^l^e^{ss (e.}^g^.^,^{a b}^eⁿ^e^fⁱ^ci^ar^y^st^art^s^t^o^recei^{ve a go}^vern^m^eⁿ^t^p^eⁿ^sⁱ^oⁿ^off^s^et^),^t^h^{e P}^a^rt^B
^pr^e^m^iu^m^am^{ount d}^o^e^s^no^t^ch^an^ge^.^F^o^r^m^o^{re i}ⁿ^f^o^rmatⁱ^oⁿ^on^t^h^{e ho}^l^d^h^a^rm^l^e^{ss p}^r^o^vⁱ^sⁱ^oⁿ^,^{see S}^o^ci^al^S^ecu^ri^t^y
^A^d^mⁱ^nis^t^r^a^tion,^V^a^ri^ab^l^e^S^u^p^p^l^e^m^en^t^a^{ry Med}ⁱ^ca^l^In^s^u^ran^{ce P}^r^emi^u^ms^{, A}^c^tua^r^ia^{l Note}^No.¹⁴^7,^by^Ja^c^que^line^A^.
^W^a^{lsh a}^{nd Burt}^{M. Ke}^steⁿ^ba^um^{, Ma}^rc^{h 20}⁰⁶^{, a}^t^http^://w^ww^.^ssa^.g^o^v^/O^A^C^T^/^NO^T^E^S/pdf^_n^ote^s^/no^t^e¹⁴⁷^.p^df^{. (He}^r^e^a^f^t^e^r
^c^ite^{d a}^s^SSA^Ac^tua^r^ia^{l Note}^No.¹⁴⁷^.)

participants (6% of those paying premiums) were held harmless in 2005, while roughly one ³³
million participants (3% of those paying premiums) were held harmless in 2006. Low-income
beneficiaries who are not required to pay Part B premiums are not affected by the hold harmless
provision, nor are high-income beneficiaries who must pay income-related Part B premiums.
Figure 2. Approximate Thresholds for Hold Harmless Provision, 1999-2008
^Source:^{Congressional Researc}^h^{Service calculations, based on figures f}^{rom the}^{2007 Medicare Trustees R}^eport
^{and the}^{2007 Social Security Trustees Rep}^ort^.
^Note:^S^{ome beneficiaries with b}^{enefits below the t}^hre^{sholds shown in this}^{figure would not}^have^{had their Part}
^{B premiums}^reduced^becau^{se the}^{ir benefit c}^{hecks wo}^{uld not have}^{declined as a result of the}^{Part B}^premium
^{increase, due to the}^{fact t}^{he Social Security bene}^{fits are rou}^nded^{down to the near}^{est dollar. There was no}
^{increase in t}^{he Medicare Part}^{B p}^{remium in}²⁰^00.
Figure 2 shows the approximate thresholds beneath which Social Security beneficiaries who paid
Part B premiums were held harmless from 1999 to 2008. The Part B premium increase is reduced ³⁴
for most beneficiaries with monthly Social Security benefits below the threshold in a given year.
If a beneficiary had benefits above the threshold in a given year, he or she would pay the full Part
B premium increase in that year. In 2008, a beneficiary with a monthly Social Security benefit of
less than $126 could be held harmless—that is, could pay a reduced Part B premium so that his or
her Social Security checks would not decline due to the Part B premium increase.

³³^SSA^Ac^tua^r^ia^{l Note}^No.¹⁴^7.
³⁴^Som^e^be^ne^fⁱ^cⁱ^a^r^ie^s^w^{ith be}^ne^f^its^be^low^the^s^e^thr^e^s^hol^ds^w^ould^no^t^h^a^{ve h}^a^d^t^h^ei^r^P^a^r^t^B^p^r^emⁱ^u^m^s^r^e^d^u^ced^b^ecau^se
^t^h^ei^{r b}^eⁿ^e^fⁱ^t^ch^ecks^w^o^u^l^d^no^t^h^a^{ve d}^eclⁱⁿ^ed^{as a resu}^l^t^o^f^t^h^e^P^a^r^t^{B p}^r^emⁱ^u^mⁱⁿ^crease,^d^u^e^t^o^t^h^{e f}^act^t^h^{e S}^o^ci^al
^Se^c^u^r^ity^be^ne^f^its^a^r^e^r^ounde^d^do^wⁿ^{to the}^ne^a^r^e^s^{t dolla}^r^.^T^h^e^s^e^thr^e^s^holds^a^p^ply^only^{to be}^ne^fⁱ^cⁱ^a^r^ie^s^w^{ho w}^e^r^e^not
^he^ld^ha^rm^le^s^s^{in the}^pre^v^{ious y}^e^a^r^{. For}^m^o^re^inf^o^rm^a^{tion, se}^e^SSA^A^c^tua^r^ia^{l Note}^{No. 14}^7.

During the past decade, Medicare Part B premiums have absorbed a growing fraction of
beneficiaries’ Social Security benefits. The deduction of Part B premiums does not affect all
beneficiaries equally. Paying the standard Part B premium, as most beneficiaries do, requires a
relatively larger deduction from small Social Security benefits than from large benefits. Social
Security benefits are based on workers’ lifetime earnings; consequently, low earners are
disproportionately affected by the deduction of Medicare premiums.
The following section illustrates how the deduction of Medicare Part B premiums would have
affected the Social Security benefits of three hypothetical workers who retired in 1998: a low ³⁵
earner, a medium earner, and a high earner. The low earner is assumed to have earned 45% of
the average wage during each year of his or her career (about $19,000 in 2008) and to receive a ³⁶
monthly Social Security benefit of about $700 in 2008. The medium earner is assumed to have
earned the average wage during each year of his or her career (about $42,000 in 2008) and to
receive a monthly Social Security benefit of about $1,200 in 2008. The high earner is assumed to
have earned 160% of the average wage during each year of his or her career (about $68,000 in
2008) and to receive a monthly Social Security benefit of $1,500 in 2008. All of the hypothetical
workers are assumed to have been born in 1930, to have worked full-time each year from age 22
to 65 with no interruptions, to have retired in 1998 at age 65, and to pay the standard Part B ³⁷
premium without low-income assistance. Figure 3 shows the percentage of each hypothetical
worker’s Social Security benefits deducted to pay the standard Part B premium from 1999 to

2008.

³⁵^T^h^e^hy^pothe^tic^a^l^w^o^r^k^e^r^s^w^e^r^e^de^v^e^lope^{d by}^SSA^’^s^a^c^t^ua^rⁱ^e^s^{. Se}^{e Soc}ⁱ^a^l^Se^c^u^rⁱ^ty^A^d^mⁱ^nis^t^r^a^tion,^O^f^fⁱ^ce^of^the
^C^h^ie^f^A^c^tua^r^y^,^A^c^tua^r^ia^{l N}^o^te^N^u^m^b^e^r^144,^Iⁿ^te^r^nal^Ra^te^s^{of Re}^t^u^rⁿ^Uⁿ^de^r^the^O^A^SD^I^Pr^o^g^r^a^m^f^o^r^H^y^pothe^tic^a^l
^Wo^rkers^{, b}^y^O^r^{lo R. N}ⁱ^c^h^ols^,^e^t^a^l^{., J}^u^ne²⁰⁰¹^{, a}^t^htt^p^://w^w^w^.s^s^a^.gov^/O^A^C^T^/^N^O^T^ES/note²⁰^00s^/ⁿ^o^t^e^144.^htm^l^.
³⁶^Th^e^av^e^r^age^w^a^geⁱ^s^d^e^fⁱⁿ^e^d^b^y^S^S^A^’s^A^v^er^ag^{e W}^a^{ge In}^d^e^{x (}^A^W^I).^T^h^{e AW}^{I t}^eⁿ^d^s^t^o^o^v^erestⁱ^m^at^{e w}^o^rker^s’
^lⁱ^f^etⁱ^m^{e e}^a^rnⁱⁿ^gs.^S^{ee Un}ⁱ^v^ersi^t^y^o^f^Mⁱ^chⁱ^g^an^Retⁱ^r^em^en^t^Rese^arch^Cen^t^er,^W^o^rkiⁿ^g^P^a^p^e^{r W}^P²⁰^04-0⁷⁴^,^M^o^de^lin^g
^Life^time^Earnⁱⁿ^{gs Pat}^h^{s: Hy}^p^o^th^e^tic^{al v}^e^{rsus Ac}^tual^W^o^rk^e^r^s^{, by}^A^ndre^w^A^u^{, Oliv}^ia^Mitc^he^ll,^aⁿ^d^John^W^.^R.^P^hⁱ^llips,
^Ma^rc^{h 20}⁰⁴^{, a}^t^http^://w^w^w^.^m^rrc^.i^s^r^.umⁱ^c^h^.e^du/^publ^ic^a^tions^/^P^a^p^e^r^s^/^pdf^/w^p074.^pdf^.
³⁷^T^h^e^low^e^a^r^ne^{r c}^ould^poteⁿ^tia^lly^qua^lif^y^f^o^{r a}^ssistaⁿ^c^e^{in pa}^yⁱ^ng^P^a^{rt B pre}^m^ium^s^if^he^{or she}^ha^d^li^ttle^or^no^inc^o^m^e
^be^sⁱ^de^s^Socⁱ^a^l^Se^c^u^r^ity^be^ne^f^its^{, ha}^{d a}^s^s^e^ts^be^low^the^s^t^a^t^ut^or^y^lim^{it (}^$^4,0⁰⁰^f^o^r^aⁿⁱⁿ^divⁱ^d^u^a^l^aⁿ^{d $}⁶^,0^{00 f}^o^r^a^c^o^up^le⁾^,
^an^d^app^lⁱ^e^d^f^o^{r assi}^st^an^ce.

Figure 3. Percentage of Total Social Security Benefits Deducted for Standard Part B
Premiums, 1999-2008
^Source:^{Congressional Researc}^h^{Service calculations, based on figures f}^{rom the}^{2007 Medicare Trustees R}^eport
^{and the}^{2007 Social Security Trustees Rep}^ort^.
^Note:^{The calculations in this figure are}^{based on i}^{ndividuals who retired in 19}^98.^{Estimates for oth}^{er cohorts}
^{would vary.}
As shown in Figure 3, a growing proportion of Social Security benefits have been deducted to
pay Part B premiums over the 10-year period. The proportion of Social Security benefits needed
to pay the Part B premium was stable from 1999 to 2001, in part because there was no premium
increase in 2000. During this period, the medium earner needed approximately 5% of his or her
Social Security benefits to pay the Part B premium each year. As the Part B premium increased
from 2001 to 2008, the proportion of Social Security benefits needed to pay the Part B premium
rose substantially. By 2008, the Part B premium absorbed about 8% of the medium earner’s
benefits.
Lower earners need a greater fraction of their Social Security benefits to pay the Part B premium
than do higher earners. For example, in 2008 the low earner in this illustration needs about 13%
of his or her Social Security benefits to pay the Part B premium. In contrast, the high earner needs
about 6% of his or her benefits to pay the Part B premium.
The Social Security COLA is designed to ensure that Social Security benefits keep up with
overall inflation. However, in some years, a disproportionate share of the COLA is absorbed by
the increase in the Part B premium. In these years, beneficiaries’ ability to pay for all other goods
and services decreases.
Using the same three hypothetical workers as examples, Figure 4 shows the percentage of the
Social Security COLA absorbed by the annual increase in Medicare premiums in each year from
1999 to 2008. The proportion of the COLA needed to pay the increase in the Part B premium has
varied substantially over time. In recent years, a large proportion of beneficiaries’ COLAs have

been absorbed by the Part B premium increase. For example, in 2004 and 2005 the Part B
premium increase absorbed more than half of the medium earner’s COLA. In 2008, the Part B
premium increase absorbed about 8% of the medium earner’s COLA.
Those with lower benefits need a greater fraction of their Social Security COLAs to cover the
Part B premium increase than those with higher benefits. In 2008, the Part B premium increase
absorbed about 13% of the low earner’s COLA and about 6% of the high earner’s COLA. None
of the workers in this example would have been held harmless, because paying the full Part B
premium increase would not have caused their benefit checks to decrease from any one year to
the next.
Figure 4. Percentage of Social Security COLAs Absorbed by Standard Part B
Increase, 1999-2008
^Source:^{Congressional Researc}^h^{Service calculations, based on figures f}^{rom the}^{2007 Medicare Trustees R}^eport
^{and the}^{2007 Social Security Trustees Rep}^ort^.
^Note:^{The calculations in this figure are}^{based on i}^{ndividuals who retired in 19}^98.^{Estimates for oth}^{er cohorts}
^{would vary.}
Most experts agree that Medicare costs will continue to outstrip the growth in prices (and thus
Social Security COLAs) and wages (and thus initial Social Security benefits). The trustees of
Social Security and Medicare project that over the long term, annual inflation will average 2.8%,
annual wage growth will average 3.9%, and annual increases in Parts B and D costs per
beneficiary will average 5% or more. Long-range projections are inherently imprecise; the further
into the future one looks, the wider the range of possible outcomes. Projections of Medicare cost
growth are particularly uncertain. Sources of uncertainty range from the difficulty of predicting
medical breakthroughs to the ongoing implementation of Part D.

If Part B costs rise at the rate the trustees have projected, premiums will absorb an increasing
share of beneficiaries’ Social Security benefits. In fact, many experts believe that Part B costs will
grow faster than the trustees have projected.
Why the Trustees’ Projections of Medicare Part B Premiums May Be Too Low
^{Trustees Assume Cuts to Ph}^{ysician Payments.}^{The Medicare trus}^{tees make t}^heir^{projections of fut}^ure
^{program costs a}^{nd pr}^emiums^bas^{ed on the}^{provisions of the law t}^{hat aut}^{horizes Medicare. The law req}^{uires a}
^{sustainable growt}^{h rate (SGR) fo}^{rmula to be}^{used to calculate Me}^{dicare physician}^payme^{nts, which}^{account for a}^bout
^{50% of Pa}^{rt B costs. Application}^{of this formula would res}^{ult in cu}^{ts to physician}^{fees of a}^{bout 5}^%^e^{ach year}^until
²⁰¹^{2. The}^{Medicare tru}^{stees ass}^u^{me that t}^{hese c}^{uts will be made.}
^{However, congressional action h}^{as preve}^{nted c}^{uts to p}^{hysician fe}^{es for 2}⁰⁰³^{to 2}⁰⁰^{7. Many}^Mem^b^{ers of Congress}
^{were concer}^{ned abo}^{ut the im}^pac^{t of potential payme}^{nt redu}^{ctions on ben}^{eficiaries’ access to servic}^{es. The trustee}^s
^{acknowledge that “multiple years}^{of significant reductions in}^p^hysic^{ian payme}^{nts pe}^{r ser}^{vice are ve}^ry^{unlikely to occur}
^{before legislative changes inte}^rve^{ne.” If th}^{e tr}^ustees^had^not^ass^um^{ed that p}^{hysician pa}^yments^{would be cut,}^projected
^{Part B costs would be significantl}^{y higher. Conse}^que^{ntly, projected Part B premiums}^{would be}^high^{er, becaus}^{e they}
^{are proportionate to}^{projected p}^{rogram costs.}
^{Trustees Assume Medicare Cost Gro}^{wth Will Slow.}^The^{Medicare trust}^{ees ass}^{ume t}^{hat th}^{e growth in}
^{Medicare costs (and th}^us^premiu^{ms) will sl}^{ow in the fut}^{ure. The}^{Congressional Budget Office (CBO) explains t}^{hat “in}
^{their long range}^{forecasts, the}^M^{edicare trustees a}^ssume^{that t}^he^{development and inc}^{reasing u}^se^{of new medical}
^{technologies will cause spending}^{per e}^{nrollee to continue to grow}^{faster t}^{han [in}^{flation and wages]}^{but t}^{hat significant}
^press^{ures will be b}^rought^{to bear}^{on the e}^{ntire health-ca}^{re syste}^m^{to reduce [costs].” Conse}^que^{ntly, the tru}^stees
^{project that t}^{he growth i}ⁿ^Medic^{are pre}^{miums will also slow}^{. The trustees’ inter}^{mediate projection is that Part B}
^premiums^{will increase by a}ⁿ^ave^{rage ann}^{ual rate of a}^bout^{5% ove}^{r the long ter}^m.
^{Many e}^xpe^{rts b}^{elieve this project}^{ed growth rate is too low. One r}^{eason is that t}^{he tr}^{ustees’ p}^{rojections are}
^{significantly lower than pa}^{st grow}^{th rates}^{for Part B p}^{remiums. If}^{Part B premiu}^{ms contin}^{ue to rise}^{at the same}^rate
^{as they}^{have in t}^he^{past, they will increase m}^uch^{more ra}^{pidly than}^{the Medicare t}^ruste^{es p}^roject.
^Sources:^{CRS Report RL32}⁵⁸^2,^{Medicare: Part B Premiums}^{, by J}^eⁿ^{nifer O’Sullivan;}^{2007 Medicare Tr}^{ustees Re}^port^{; and}
^CBO,^{The Long-Term Budget Outlo}^ok^{, December 2}⁰⁰^7.
Figure 5 shows the proportion of Social Security benefits that a hypothetical low, medium, and
high earner would need to pay standard Part B premiums in each year from 2009 to 2080, using
the trustees’ intermediate projections. None of the workers were assumed to be subject to higher
Part B premiums for high-income beneficiaries that began in 2007. Each year in the graph shows
the projected percentage of Social Security benefits that each worker would need to pay Medicare
premiums if he or she turned 65 and retired in January of that year.
The estimates in Figures 5 and 6 show the proportion of initial Social Security benefits needed to
pay Medicare premiums for a series of different cohorts. Initial Social Security benefits are
indexed to wages. In contrast, the estimates in Figure 3 show the proportion of Social Security
benefits needed to pay Medicare premiums for a single cohort over time. After the initial year,
benefits are indexed to inflation using the COLA. This difference is important because Figure 3
compares Medicare premium growth to price growth (i.e., inflation), whereas Figures 5 and 6
compare Medicare premium growth to wage growth. On average, Medicare premiums have
grown faster than both wages and prices and are projected to do so in the future.

Figure 5. Percentage of Initial Social Security Benefits Deducted for Standard
Medicare Part B Premiums, 2009-2080
^Source:^{Congressional Researc}^h^{Service calculations using inter}^m^{ediate projections from the}²⁰⁰⁷^Medicare
^{Trustees Report}^{(data u}^{nderlying figure I}^{II.C1, provided by CMS).}
^Note:^{Part B premiums are}^no^t^e^{xpected to decrea}^{se as a}^proport^{ion of Socia}^{l Security benefits, as}^{they are}
^{shown to do in the ea}^{rly years of}^{Figure 5}^.^{Figure 5}^{is based on the tr}^{ustees’ p}^{rojections; the tru}^stees
^{acknowledge that their s}^hort-ruⁿ^{projections of Part B costs are “}^{unrealistically low” due to the assumption t}^hat
^physician^payme^{nts will be cut (}²^{007 Medicare Trustees Report}^{, p. 2}^{1). In addition,}^{Figures 5 and 6}^{show a}
^{cohort of hy}^{pothetical workers}^e^{ach year}^{in the first year of}^{their r}^{etirements, whe}^reas^{Figure 3}^sh^{ows a single}
^{cohort of hy}^{pothetical workers over time.}
Beneficiaries are projected to need a much larger fraction of their Social Security benefits to pay
Part B premiums in the future. For example, the medium earner who retires in 2009 is projected
to need 7% of his or her benefits to pay the Part B premium in the first year of retirement. The
medium earner who retires in 2080 is projected to need more than twice that share, using 15% of
his or her benefits to pay the Part B premium in the first year of retirement.
In the future, as in the past, low earners will need a greater fraction of their benefits to pay the
Part B premium than will high earners. A low earner retiring in 2080 is projected to need 25% of
his or her benefits to pay the Part B premium in the first year of retirement. In contrast, a high
earner retiring in 2080 is projected to need 12% of his or her benefits to pay the Part B premium
in the first year of retirement.
Since Medicare Part D was implemented in 2006, it is difficult to project how it might change
over time. (See the text box below.) Early estimates of Part D costs varied widely. The nature of
Part D makes it difficult to project premiums, because individual plans set premiums for their

beneficiaries. In general, prescription drug spending has been rising at least as much as overall ³⁸
health spending; this trend is expected to continue.
Uncertainties in Projecting Part D Premiums
^{How will drug}^{prices a}^{nd utilization chan}^ge?^Change^{s in dru}^{g prices a}^{nd utilization could have a significant}
^{impact on Part D p}^{remiums. I}^f^ge^{neric drugs}^{become in}^creasingly^{available or more widely used, premiums could be}
^{lower than ex}^{pected. Alternativel}^{y, pharmac}^{eutical breakt}^hroug^hs^{or increased use}^{of ex}^pensive^pr^{escriptions could}
^{lead to higher premi}^ums.
^{How many p}^rescription^dru^g^{plans will com}^{pete for benef}^iciaries?^{In the}^{first seve}^{ral years}^of
^{implementation, a greater-tha}^n-expected^num^{ber of}^{plans offe}^red^{Part D bene}^{fits. If a large n}^u^m^ber^{of plans contin}^ue
^{to offer Part D be}^{nefits, competit}^{ion to attract bene}^{ficiaries could drive down premiums. Alter}^{natively, some analysts}
^{believe that the}^{fierce com}^petitio^{n for b}^{eneficiaries will force some plans out of Part}^{D in fu}^ture^ye^{ars, reducing}
^{competition and leading to higher}^premium^s.
Figure 6 shows the proportion of Social Security benefits needed to pay combined Part B and
Part D premiums for hypothetical workers retiring in each year from 2009 to 2080, using the
trustees’ intermediate projections. Each year in the graph shows the projected percentage of
Social Security benefits that a low, medium, and high earner would need to pay Medicare
premiums if he or she turned 65 and retired in January of that year. All beneficiaries are assumed
to pay the standard Part B premium as well as the average premium for standard Part D
coverage. In interpreting Figure 6, it is important to note that Part D premiums vary widely by
plan, and that Part D premiums may be deducted from beneficiaries’ Social Security checks or be
paid directly to the plan.
Together, Part B and Part D premiums are projected to consume an increasing share of
beneficiaries’ Social Security benefits over time. For example, the medium earner retiring in 2009
is projected to need 9% of benefits to pay Parts B and D premiums in the first year of retirement.
The medium earner retiring in 2080 is projected to need more than twice that share, using 23% of
benefits to pay Parts B and D premiums in the first year of retirement.

³⁸^Bo^rger,^Ch^ri^stⁱⁿ^e,^et^al^.^,^“Heal^t^h^S^p^en^diⁿ^g^P^r^o^j^ectⁱ^oⁿ^s^T^h^ro^u^{gh 201}⁵^:^C^h^an^{ges o}ⁿ^t^h^{e H}^o^ri^zo^n,^”^He^alth^Aff^a^irs⁽²^5),
^Fe^brua^ry^{22, 2}⁰⁰⁶^{, a}^v^a^ila^ble^a^t^ht^tp://c^oⁿ^te^nt^.he^a^ltha^f^f^a^irs.org^/^c^g^i/re^p^rint/^25/^2/^w^61.

Figure 6. Percentage of Initial Social Security Benefits Deducted for Standard Part B
and D Premiums, 2009-2080
^Source:^{Congressional Researc}^h^{Service calculations using inter}^m^{ediate projections from the}²⁰⁰⁷^Medicare
^{Trustees Report}^{(data u}^{nderlying figure I}^{II.C1, provided by CMS).}
^Note:^{Part B premiums are}^no^t^e^{xpected to decrea}^{se as a}^proport^{ion of Socia}^{l Security benefits, as}^{they are}
^{shown to do in the ea}^{rly years of}^{Figure 5}^.^{Figure 5}^{is based on the tr}^{ustees’ p}^{rojections; the tru}^stees
^{acknowledge that their s}^hort-ruⁿ^{projections of Part B costs are “}^{unrealistically low” due to the assumption t}^hat
^physician^payme^{nts will be cut (}²^{007 Medicare Trustees Report}^{, p. 2}^{1). In addition,}^{Figures 5 and 6}^{show a}
^{cohort of hy}^{pothetical workers}^e^{ach year}^{in the first year of}^{their r}^{etirements, whe}^reas^{Figure 3}^sh^{ows a single}
^{cohort of hy}^{pothetical workers over time.}
Low earners will need a greater proportion of their Social Security benefits to pay for combined
Parts B and D premiums than will high earners. A low earner who retires in 2080 is projected to
need about 38% his or her Social Security benefits to pay Parts B and D premiums in the first
year of retirement. In contrast, a high earner who retires in 2080 is projected to need 18% of his
or her benefits to pay Parts B and D premiums in the first year of retirement.

Any changes to the way Medicare premiums or Social Security benefits are calculated would also ^th
change the number of beneficiaries held harmless. To date, there are two bills in the 110
Congress that would hold more Social Security beneficiaries harmless for increases in Medicare
premiums.
H.R. 4807, introduced by Representative Stephanie Herseth Sandlin, and S. 2501, introduced by
Senator Tim Johnson, would extend the current law hold harmless provision to apply to increases
in Medicare Part D premiums. In addition, these bills would limit the combined annual increase
in the Part B premium and the average Part D premium for standard coverage to 25% of each
beneficiary’s annual Social Security COLA. By including Part D premiums in the hold harmless
provision and limiting the proportion of the COLA used to pay for premium increases, H.R. 3954

and S. 1795 would raise the thresholds at which beneficiaries are held harmless. As a result, more
beneficiaries would be held harmless, and part of these beneficiaries’ premium costs could be
shifted to Medicare. No cost estimates for these bills are available at the time of this writing.

Rising Medicare premiums are consuming a growing share of beneficiaries’ Social Security
benefits. An increasing number of Americans will be affected by this interaction as the number of
Social Security and Medicare beneficiaries grows over time. The Social Security trustees project
that by 2050, the proportion of Americans aged 65 and older—most of whom are eligible for both ³⁹
Social Security and Medicare—will almost double.
Low-income beneficiaries and those who rely primarily on Social Security may see a decline in
their standard of living as their Medicare expenses rise. Premiums for Parts B and D are projected
to increase significantly faster than Social Security benefits. Out-of-pocket costs for Parts B and
D are projected to grow at the same rates as premiums, contributing to the growing health-care
expenses of beneficiaries. Most beneficiaries are likely to have income apart from their Social
Security benefits. However, many of tomorrow’s beneficiaries, like today’s, are likely to rely
mostly on Social Security, especially as traditional pension coverage declines and many ⁴⁰
Americans save little or nothing for retirement. These beneficiaries could struggle to cover their
health-care expenses.
Rising health-care costs have serious consequences, not just for Social Security beneficiaries, but
for everyone who pays health-care costs. Premiums for employer-sponsored health insurance are
also rising faster than wages and inflation, which contributes to the declining number of ⁴¹
employers offering health insurance coverage, from 69% in 2000 to 60% in 2007. About one-⁴²
fifth of Americans under age 65 have no health insurance coverage.
Federal and state budgets are also struggling to meet growing health-care costs. CBO projects that ⁴³
Medicare’s costs will more than triple as a share of the economy by 2050. Similarly, CBO
projects that the federal costs of Medicaid, the federal-state low-income health-care program, will
more than double as a share of the economy; growth will cause similar strains for state budgets.
Growth of this magnitude has important economic effects. According to CBO, the rate at which
health-care costs grow relative to national income is the most important factor affecting the ⁴⁴
nation’s long-term fiscal outlook.

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^Sur^v^e^y^{, Se}^pte^m^be^r²⁰⁰^{7, a}^t^htt^p^://^w^w^w^.^k^f^f^.or^g^/ins^u^r^a^nc^e^/⁷⁶⁷²^/^uplo^a^d/76⁷²^3.^pdf^.
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^http:^//w^w^w^.c^bo.g^o^v^/^f^t^pdoc^s^/^88x^x/doc⁸⁸⁷⁷^/^12-^13-^L^T^B^O^.^pdf^{. H}^e^r^e^a^f^te^r^c^ite^{d a}^s^C^B^O^Long-^Te^r^m^O^u^tlook^{, 20}⁰⁷^.⁾
⁴⁴^C^B^O^Lo^ng-^Te^r^m^O^u^tlo^ok^{, 20}^07.

Finally, it is important to remember that Social Security beneficiaries gain from their participation
in the Medicare program. Medicare provides health-care coverage to the vast majority of
Americans aged 65 and older and to most disability beneficiaries. Together, Medicare and
Medicaid cover a majority of participating Social Security beneficiaries’ health-care expenses.
Although Social Security beneficiaries are affected by rising health-care costs, the benefits of
participating in Medicare are substantially greater than the costs.

^Kath^leeⁿ^Ro^mⁱ^g
^An^al^y^s^{t i}ⁿ^In^co^m^e^Secu^ri^t^y
^k^r^o^mⁱ^g^@^c^r^s^.l^oc.g^ov^{, 7-}³⁷⁴²