NCPA - National Center for Policy Analysis

COSTS OF MEDICARE SNOWBALL

April 13, 2005

Medicare will start to cut into your retirement benefits the day you retire, says Scott Burns, financial columnist for the Dallas Morning News. Your entire Social Security benefit could be absorbed by your Medicare premium if proposals to change from wage-based growth of Social Security benefits before retirement to inflation-based growth become law, he says. That's the power of compounding working against you.

Retirees receive their basic monthly benefit, which is calculated at retirement, but before the check is mailed, a monthly premium for Medicare Part B insurance is deducted. The lower your Social Security benefit, the bigger the impact. As a consequence, the Medicare Part B premium is taking a bigger and bigger slice out of the basic benefit:

  • In 2000, the Medicare Part B premium was $45.50 but has risen at an 11.4 percent compound rate, reaching $78.20 a month this year.
  • During the same period, the annual cost of living adjustment (COLA), for the basic benefit has been only 2.46 percent.
  • The 2004 trustees' report estimates a 2006 monthly premium of $80, the 2005 report estimates $87.70, and more recent reports estimate an increase approaching 15 percent.

Burns says this is not a minor problem. Medicare is crowding out Social Security, and without government benefit cuts in nominal dollars, a low-income worker who retires this year could lose about as much purchasing power over the next 15 years -- 26 percent -- as the Social Security trustees are warning may occur in 37 years.

Social Security benefits may be nominally adjusted for inflation, but retirees do not live on a fixed income, says Burns, they live on a declining income. Even workers at the highest benefit rate will suffer a significant loss of purchasing power if Medicare premium growth continues to leave COLAs in the dust.

Source: Scott Burns, "Costs of Medicare Snowball," Dallas Morning News, April 9, 2005.

 

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