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Social Security raise next year may be tiny

CHICAGO - Last October seniors got some really good news about their Social Security cost-of-living adjustment. This October? Not so much.

This year seniors have benefited from the robust 3.6 percent 2012 Social Security cost-of-living adjustment (COLA). Adding to the good news, they learned Medicare premiums wouldn't take much of a nick out of their inflation raise.

Next year, the Social Security COLA for 2013 is expected to be 1.4 percent - and for many seniors, much of that will be eaten up by a higher Medicare Part B premium.

We won't get the final word on the 2013 Social Security COLA until October 16, after the Bureau of Labor Statistics (BLS) releases inflation numbers for September. But it's not looking good for retirees on a fixed income.

To reach the yearly COLA adjustment the Social Security Administration averages together third-quarter inflation as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). July and August reports are pointing toward a COLA of just 1.4 percent.

However, many seniors won't even get that much because of the interplay of the COLA and premiums for Medicare Part B, which covers outpatient services. These two go hand in hand since the premium is deducted from most seniors' benefits.

Last year the Part B premium rose by a modest $3.50 per month, which meant seniors kept most of that large 3.6 percent COLA. For example, a senior receiving the average monthly Social Security benefit ($1,177) received a net 3.3 percent increase.

Retirement made easy: Here is the magic number

Experts expect the Part B premium to rise from 5 percent to 10 percent in 2013; the Medicare trustees said earlier this year that a 9.2 percent increase was most likely. That translates to a $9.20 monthly increase over this year's $99.90 premium. That means some seniors will see no net increase at all, while many others will get far less than 1.4 percent.

"It certainly isn't going to be enough to face the higher heating bills and all the other higher expenses seniors will face next year," says Mary Johnson, a Social Security and Medicare policy analyst for the Senior Citizens League (SCL), a nonpartisan consumer advocacy group.

The likely paltry COLA will also add to the debate over what measure of inflation is most appropriate for determining Social Security's annual benefit adjustments.

Who pays the freight?
Here's how it works. By law, most Medicare enrollees can't be charged a Part B premium that produces a net reduction in Social Security benefits. Assuming the Social Security and Medicare percentages come in as forecast, this "hold harmless" feature would protect seniors with Social Security benefits of $625 or lower, according to SCL.

Seniors with higher benefits would see a small inflation raise. A senior with a $1,000 monthly benefit would see a 0.48 percent net increase after the Part B adjustment; for a $1,500 monthly benefit, the net COLA would be 0.79 percent.

The hold-harmless provision doesn't protect three groups of beneficiaries: high-income seniors, new enrollees in Medicare this year (whose benefits can't decline from one year to the next), and low-income seniors who are eligible for Medicare and Medicaid. (This last group doesn't pay the premium out of pocket anyway; state Medicaid programs pick up the costs.)

High-income beneficiaries include individuals with annual income starting at $85,000 (single filers) or $170,000 (joint filers), and move up from there.

This group pays full freight on the Part B premium, plus an income-based surcharge. And the surcharges aren't limited to Part B: Extra premiums also are charged for prescription drug plans (Part D) and Medicare Advantage plans (Part C).

The un-COLA
This year's small COLA will figure in Washington's discussion of selecting the best inflation measure for determining Social Security's annual benefit adjustments.

Many advocates for seniors argue that the CPI-W understates the inflation that affects seniors - mainly their healthcare expenses. They've been pushing for adoption of a more realistic measure that better reflects seniors' costs - an experimental index maintained by the BLS called the CPI-E (for elderly).

Meanwhile, the key federal deficit reduction plans that have been advanced in Washington advocates moving in the opposite direction. These plans have recommended adopting a measure of inflation called the "chained CPI." That index would rise more slowly than the current measure (the CPI-W).

That debate is apt to continue for some time. Meanwhile, next year's COLA looks like an "October surprise" for seniors on Social Security.

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