Retirees, There's No Fizz To The Flat Inflation Adjustment You'll Get Next Year

Zilch. Nada. Diddly squat.

Take your pick of words that best describe the Social Security inflation adjustment announced this week, but it all adds up to this: another year of flat benefits. The U.S. Social Security Administration declared a 0.3% cost-of-living adjustment (COLA) for 2017—a bit more than the zero increase in 2016. But the entire increase likely will go to straight into higher Medicare Part B premiums, which are deducted from benefit payments for most retirees.

The Social Security COLA has lacked fizz for much of the past decade. It has been less than 2% since 2009, with the exception of 2011 when it was 3.6%. For three years there was no inflation adjustment at all.

By law, the COLA is determined by an automatic formula tied to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Produced by the U.S. Bureau of Labor Statistics (BLS), the index gauges a market basket of goods and services purchased by working people, and it has been muted lately by low energy prices, said Max Gulker, senior research fellow at the American Institute for Economic Research.

Read: Social Security Benefits to Rise 0.3% in 2017

"If you look category by category at prices that are up or down, energy is what is pulling things down overall," he said. "The categories that are really rising are healthcare and education costs."

Advocates for seniors would prefer a COLA driven by an index more sensitive to the inflation that impacts seniors, such as the CPI-E (for elderly), an experimental index maintained by the BLS. The CPI-E has risen only slightly more quickly than the CPI-W over the past decade, but there is a clear need to deal with the impact of healthcare in calculating COLAs. The elderly population spends more than twice as much on medical care than the general population, according to the Center for Retirement Research at Boston College.

Broader debate needed

Consider how this year's meager COLA will play out for the typical retiree. The average Social Security beneficiary will receive a monthly raise of just $5, to $1,360, according to the SSA. But the five-spot could all go to healthcare.

Final Medicare premium figures will not be released until later this autumn. But projections by the Medicare trustees point to a sharp 22% increase in the monthly Part B premium (which covers outpatient services), to $149.

Federal law contains a "hold harmless" provision—the idea is to protect people enrolled in Social Security from a decline in their benefits. The rule prevents the dollar increase in the Part B premium from exceeding the dollar increase in a Social Security benefit—and it protects about 70% of Medicare enrollees.

But the hold-harmless rule effectively places the entire burden of higher Part B costs borne by enrollees (25% of overall program costs) on 30% of the Medicare population—one reason why the premium is expected to rise so sharply. Who would be affected next year by this inequitable structure?

• Anyone who is delaying their filing for Social Security benefit
• Federal retirees who participated solely in the older Civil Service Retirement System and, therefore do not receive Social Security benefits
• State government workers - most of whom participate in defined-benefit pension plans and are not covered by Social Security during their tenure as state employees
• Low-income "dual-eligible" seniors who receive Social Security and also participate in both Medicare and state-run Medicaid programs (Their premiums are absorbed by state Medicaid budgets.)
• Anyone enrolling in Medicare for the first time next year
• Affluent seniors who pay high-income Medicare premium surcharges

Moreover, all Medicare enrollees will face a higher Part B deductible, projected to rise from $166 to $204 next year. And premiums for Part D prescription drug plans are also jumping. The average monthly premium will rise by 9%, to $42.17, according to a Kaiser Family Foundation (KFF) analysis released this week. The average Part D PDP deductible is projected to rise by 7%. The sharp increases underscore the importance of doing a plan checkup during the annual enrollment season now under way.

Taken together, these numbers are a big deal for seniors, many of whom live on modest, fixed incomes - in 2014, half of the Medicare population lived on annual incomes of $24,150 or less, according to KFF.

So the long-range solution to the COLA mess should be crafted in the context of a broader debate about Social Security reform. We need that conversation to take place in the bright sunshine of open debate in Congress, and it should be focused on expanding benefits while fixing Social Security's long-range financial shortfall. Bigger benefit checks and more generous COLAs should be on the menu for discussion.

Short-term action is needed, too. U.S. Senate progressives led by Massachusetts Democrat Elizabeth Warren are calling for a one-time "emergency" COLA of 3.9%—equal to the average percentage raise that top CEOs received last year.

Last year, Congress responded to calls for fairness on Part B by implementing a fix that blunted the increase substantially for those not held harmless, and a group of 75 national advocacy organizations already is urging Congress to take action again this year. Anything is possible after the Nov. 8 elections, so final premium numbers might not be known until the very end of the year.

But here's hoping lawmakers do take action. Fair is fair.