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Social Security

The Incredible Shrinking 2% Social Security COLA

Monthly benefits will increase, on average, $27 in 2018. Or will they?

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Drumroll please. The Social Security Administration today announced that 61 million beneficiaries will receive a 2% cost of living adjustment (COLA) starting with benefits paid in January 2018. That's music to the ears of seniors who got a skimpy 0.3% hike at the beginning of this year, after being stiffed with no COLA at all in 2016. Next year's 2% hike, which is based on inflation as measured by the consumer price index, is the largest since a 3.6% increase in 2011.

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Social Security says the average benefit will rise by $27 a month.

But don't start feeling like the drum major at the head of a parade just yet. Come January, you'll more likely feel like the guy sweeping up at the end.

There's a good chance that most, if not all, of the increase will be spirited away to cover higher Medicare premiums before it ever makes its way into the automatic deposit into your bank account. Part of the blame goes to a rule that's actually designed to help beneficiaries, and successfully has been doing just that for the past few years.

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The "hold harmless" provision prevents Medicare Part B premiums, which in most cases are deducted from Social Security benefits, from rising by more dollars than benefits do. So, when COLAs are small or nonexistent, premiums can't rise as fast as they should to keep pace with rising medical costs. The provision covers most beneficiaries, except first-time enrollees, those who don't have premiums deducted from benefits (because they haven't begun receiving benefits) and those subject to high-income premium surcharges.

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The coming 2018 COLA means Medicare premiums can rise for everyone. And, folks whose costs were held down by hold-harmless in the past might be called on to make up some of the difference.

Here's how it's explained by Judith Graham, a contributing columnist for Kaiser Health News:

"Since there was no cost-of-living adjustment for Social Security in 2016, Part B monthly premiums didn't go up that year for seniors covered by hold-harmless provisions. Instead, premiums for this group remained flat at $104.90 -- where they've been for the previous three years.

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"Last year, Social Security gave recipients a tiny 0.3 percent cost-of-living increase. As a result, average 2017 Part B monthly premiums rose slightly, to $109, for seniors in the hold-harmless group. The 2017 monthly premium average, paid by those who weren't in this group and who therefore pay full freight, was $134."

We won't know what the 2018 Part B premium will be for a few weeks. But Graham reports that Social Security "is expected to ask older adults who paid $109 this year to pay $134 for Part B coverage next year -- an increase of $25 a month."

Hmmmm. Go back to the top of the story to see how much, on average, the 2% COLA is expected to add to a monthly benefit. (Heck, you don't have go back to the top. It's $27.) Subtracting a $25 hike in Part B premiums will leave the average beneficiary with, ta-da: a $2 increase.

There is a silver lining for some retirees. Under this scenario, those already paying $134 a month for Medicare B would see no increase in 2018 premiums. And, if you’re receiving more than the average benefit, the 2% COLA will be worth more than $27. For a married couple receiving a combined $4,000 a month, for example, the 2% hike will boost benefits by $80 a month or nearly $1,000 for the year.

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