Every fall, many Americans anticipate the announcement of two key numbers: the Social Security Cost-of-Living Adjustment (COLA) and Medicare Part B premiums. These announcements have an impact on retirees’ budgets, shaping how much they will receive from Social Security and how much they will pay for Medicare.
2025 COLA predictions
The Social Security COLA is determined by the year-to-year change in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W tracks the cost of goods and services, and the COLA reflects this change to ensure Social Security benefits maintain purchasing power. For 2024, the COLA increase was 3.2%, and early estimates predict a modest 2.5% increase in 2025. However, these are projections based on current inflation trends, and the final figure will be revealed in October 2024.
Despite this adjustment, the COLA doesn’t directly dictate Medicare premiums. Rather, it ensures that Social Security benefits rise in step with inflation, but healthcare costs are influenced by broader economic factors.
Medicare Part B premiums in 2025
Medicare Part B premiums are expected to increase in 2025, but the final numbers haven’t been confirmed yet. Medicare Part B premiums aren’t based on inflation rates. Instead, they’re dependent on the health insurance program’s projected annual costs, though inflation does play a part in those projections.
For 2024, the base Part B premium was $ 174.70 per person, but the Trustees’ report predicted this could rise to $185 a month in 2025. It’s important to note that these projections can vary, and the official number, set by the Centers for Medicare & Medicaid Services (CMS), will be announced alongside the COLA.
While Medicare premiums don’t rise in direct relation to the COLA, inflation and rising healthcare costs can influence the final premium amounts. For instance, increased spending on outpatient care, doctor visits, and durable medical equipment, all covered by Medicare Part B, drives premium growth.
The Hold-Harmless provision
One of the key mechanisms protecting Social Security beneficiaries from excessive Medicare premium hikes is the hold-harmless provision. This provision ensures that an individual’s Social Security benefits cannot decrease due to a rise in Medicare premiums. In years where COLA increases are modest, like the expected 2.5% in 2025; the provision will apply to some beneficiaries, preventing their net Social Security payments from being reduced.
The hold-harmless provision primarily benefits those with lower Social Security checks. For those receiving higher benefits, the increase in Social Security payments will likely outpace the rise in Medicare premiums. Historically, when there is a large discrepancy between the COLA and Medicare premiums, the hold-harmless provision comes into play more frequently
The impact of the IRMAA on high-income beneficiaries
Medicare premiums are not uniform for all beneficiaries. High-income earners pay more in Medicare premiums due to the Income-Related Monthly Adjustment Amount (IRMAA). IRMAA adjusts premiums based on income, and for 2024, individuals earning more than $103,000 (or couples earning more than $206,000) are subject to this surcharge. This means higher earners pay between $244.60 and $594.00 per month for Part B, depending on their income bracket.
The thresholds for IRMAA are adjusted each year based on a slightly different inflation index, the Consumer Price Index for Urban Consumers (CPI-U). This ensures that the income levels are responsive to inflation, and for 2025, these income thresholds are likely to rise again.
