The 2025 Social Security COLA is estimated to be around 2.5%. For many retirees, rising costs of Medicare premiums could offset much of this raise.

If you wish to skip our detailed analysis on Social Security benefits and Medicare, you may go to 5 Reasons Why Rising Medicare Premiums Could Wipe Out Your Raise.

Impact of Medicare on Social Security

In the United States of America, Social Security is a commonly used term referring to the country’s federal program. It provides retirement benefits and disability income to qualified individuals, their spouses, children, and survivors. The term is most often associated with retirement benefits. As of 2024, over 72 million Americans benefit from the Social Security program.

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On the other hand, Medicare is the USA’s health insurance program run by the Centers for Medicare & Medicaid Services for people aged 65 or older. The program helps in paying for inpatient hospital care, doctors’ fees, drugs, nursing care, and other medical services and supplies. An individual in the U.S. who has worked and paid Social Security taxes on their earnings generally qualifies for both Social Security benefits and Medicare.

The two programs intertwine in that the Social Security Administration collaborates with the Centers for Medicare & Medicaid Services (CMS) to provide individuals with information and guidance on Medicare enrollment options, processing Medicare applications, and collecting Medicare premiums. An individual drawing Social Security benefits has Medicare Part B premiums automatically deducted from their monthly payments, unlike Medicare Part A which is free for most people at age 65 and covers major hospital expenses such as hospital visits.

As of 2024, the standard monthly premium for Medicare Part B enrollees is $174.70 with a yearly deductible of $240. The premium rates rise with the beneficiary’s income, and the Social Security Administration determines whether an individual will pay a higher premium or not based on the income information it receives from the IRS. The standard Medicare premium of $174.70 rose by $9.80 from $164.90 the prior year, while the annual deductible increased by $14 from a yearly deductible of $226 in 2023.

The Medicare Part B premium most likely changes every year. This is because these costs, including copays, deductibles, and Part B premiums, are adjusted based on the Social Security Act. These costs have reportedly been rising due to projected increases in healthcare spending.

As per CMS.gov,

“The increase in the Part B premiums and deductible is largely due to rising spending on physician-administered drugs. These higher costs have a ripple effect and result in higher Part B premiums and deductible”.

In addition to the rising costs of Medicare Part B premiums, retirees must also contend with Medicare Part D premiums, which, although not directly deducted from Social Security benefits, still significantly impact overall retirement budgets. As per CMS, the average monthly premium for Part D plans is approximately $55, though this can vary based on the specific plan and income level of the retiree.

Apart from these premiums, a hard-hitting reality for seniors, especially retirees, is that Medicare doesn’t cover everything. For instance, dental care and hearing aids aren’t covered by the program, so much so that an average 65-year-old couple spends an estimated $280,000 on healthcare for the rest of their lives, notes Fidelity Investments.

This is why many people opt to buy additional insurance. For instance, UnitedHealth Group Incorporated (NYSE:UNH), through its subsidiary, offers a range of Medicare Advantage plans. These private plans offer Medicare benefits, often including additional services and benefits not covered by traditional Medicare, such as vision and dental care. The company plays a significant role in the Medicare market, serving millions of beneficiaries.

As Medicare premiums and out-of-pocket costs continue to rise, they present a significant challenge to retirees’ financial stability. As such, retirees are often on the lookout for good stocks to buy that offer attractive dividends and have room for growth, and UnitedHealth Group Incorporated (NYSE:UNH) seems to be a good option. With the anticipated population growth likely to drive up demand for health insurance, UnitedHealth Group Incorporated (NYSE:UNH) reported strong second-quarter performance, with earnings per share reaching $6.80—2.3% above estimates—and a 6.4% increase in revenue to $98.9 billion compared to the previous year. This success is partly due to the growth in its U.S. customer base through UnitedHealth Group Incorporated (NYSE:UNH) and its value-based care initiatives via Optum. Additionally, UnitedHealth Group currently offers a quarterly dividend of $2.10 per share.

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Methodology

To devise our list of Social Security COLA 2025: 7 Reasons Why Rising Medicare Premiums Could Wipe Out Your Raise, we first analyzed projected changes in Medicare premiums and how they relate to expected Social Security COLA adjustments. We reviewed data from the Centers for Medicare & Medicaid Services (CMS) and Social Security Administration (SSA) to identify trends and anticipated increases in Medicare costs. We then examined historical data on Medicare premiums and Social Security COLA to assess their impact on beneficiaries. Additionally, we included expert insights and projections from reliable financial and healthcare sources to highlight key reasons why rising Medicare costs might significantly erode the benefits of the Social Security COLA increase.

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Here are 7 Reasons Why Rising Medicare Premiums Could Wipe Out Your Raise from your Social Security COLA:

7.     Additional Medicare Coverage Costs

Additional Medicare coverage costs—ranging from premiums for Medicare Advantage and Part D plans to Medigap policies, deductibles, and coinsurance—can significantly impact retirees’ financial well-being. These expenses, combined with out-of-pocket costs for non-covered services and income-related premium adjustments, contribute to the overall burden of healthcare spending for retirees. Understanding and planning for these costs is essential for managing retirement finances effectively.

6. The Growing Gap between Social Security Benefits and Medicare Expenses

In 2024, the standard monthly premium for part B increased by 6% to $174.70. Meanwhile, the Social Security COLA announced for the year was 3.2%. Since Medicare premiums are based on income, some enrollees pay even more than this. Historically, Medicare costs, including premiums and deductibles, have risen faster than Social Security COLA adjustments.

This growing gap uncovers a significant challenge for retirees as it diminishes their purchasing power and also increases financial strain. As Medicare premiums and out-of-pocket costs rise faster than Social Security COLA adjustments, retirees find a larger portion of their income dedicated to healthcare, reducing their ability to cover other essential needs. This growing disparity can lead to financial instability, potential debt, and a decreased quality of life, further discouraging necessary medical care at a time when people need it most.

5.     How Healthcare Inflation Outpaces Social Security Increases

Spending on prescription drugs administered in a physician’s office can drive up Medicare Part B premiums. These rising costs can impact the overall benefit of the Social Security COLA adjustment. According to a RAND report, prescription drug prices in the USA are much higher than in other countries, with US prices averaging 2.78 times than those in 33 other countries. As healthcare expenses continue to rise at a rate that often outpaces COLA increases, retirees may find their purchasing power diminished, making it increasingly difficult to cover essential living expenses.

4.     Medicare Deductibles and Copays: Additional Costs to Consider

In addition to rising Medicare Part B premiums, retirees must also consider increasing Medicare Part D premiums, deductibles, and out-of-pocket costs. While the average monthly premium for Part D plans is around $55, this amount can vary depending on the specific plan and the retiree’s income level.

Medicare Part D also has a $2,000 out-of-pocket cap on prescription drug costs, which limits how much retirees pay for medications annually. However, this cap does not cover other rising costs, such as rising premiums and non-drug-related medical expenses. These increasing expenses can still offset the financial benefit provided by the Social Security COLA increase.

3.     Higher-Income Retirees Will Feel the Biggest Impact Due to IRMAA

For individuals whose income is above a specific limit, the federal government adds an extra charge to their monthly premium. An estimated 8% of Medicare recipients pay higher premiums for parts B and D because of these Income-Related Monthly Adjustment Amounts (IRMAA). The IRMAA is calculated based on the modified adjusted gross income (MAGI) from the previous two year’s IRS tax return.

With Medicare premiums rising, those who have higher incomes are bound to see larger increases due to the IRMAA. This will in turn reduce the impact of the COLA increase they would have otherwise received.

2.     The ‘Hold Harmless’ Provision May Not Protect Everyone

While the standard Part B premiums for 2024 were between $174.70 and $594 depending on one’s income, many people may pay less than this amount due to a “hold harmless” rule. This rule states that the part B premiums may not increase more than the Social Security COLA increase in any given year, preventing SS checks from declining year-over-year and capping part B premium increases to no more than the amount of COLA.

While the hold harmless rule aims to protect beneficiaries from having their Social Security checks reduced due to higher premiums, the rule only applies when the COLA increase is less than the Medicare premiums increase. Also, those who are not covered by this provision will likely have a reduction in their net income, since the increase in Medicare premiums may outstrip the COLA adjustment. Some individuals not covered by the provision include those who make payments for part B insurance directly to Medicare or those who have premiums paid by Medicaid.

1.     Projected Medicare Part B Premium Increases for 2025

Even though the change hasn’t been announced yet, Medicare premiums are expected to increase in 2025. Earlier this year, the Medicare Trustees estimated that Part B premiums would be around $185 in 2025, a $10.30 increase from $174.70 in 2024. Since the Social Security COLA is expected to be around 2.5%, or $48, a portion of the COLA will seemingly be wiped out by this premium. Part B premiums are deducted directly from Social Security benefits, implying that a rise in these premiums can result in a negligible net increase in benefits for many retirees.

According to Mary Johnson, an independent Social Security and Medicare policy analyst, part B premiums and any voluntary withholdings from taxes are automatically deducted from Social Security checks. When these premiums grow at a faster rate than COLAs, the costs consume a larger portion of one’s monthly Social Security checks. Moreover, since Medicare costs are currently not included in the consumer price index used to calculate the COLA, it leads to a disparity.

“Ironically that index, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), does not survey retired adults aged 62 and older, the very people the Social Security COLA is supposed to protect”.

– Mary Johnson, independent Social Security and Medicare policy analyst.

To quote an example, if Social Security benefits increase by 2.5%, a retiree with a monthly benefit of $1,500 would see an increase of $37.50, making the new benefit $1,537.50. On the other hand, if Medicare premiums rise from $174.70 to $185, this increase is $10.30. If the premium increase is $10.30 and COLA is $37.50, the retiree’s net benefit increase is $27.20. The net gain is reduced because of the premium increase.

What You Can Do to Maximize Your Benefits in 2025

Managing expenses amidst a smaller COLA and rising healthcare costs can be hard. Here are some strategies to maximize Social Security benefits:

• Delay Benefits: Retirees can consider claiming Social Security benefits past full retirement age to increase monthly payments.
• Maximize Earnings: Ensure your highest-earning years are accurately reported for larger benefits.
• Coordinate with Spouse: One can also optimize claiming strategies with a spouse to maximize household benefits.
• Review Medicare Plans During Open Enrollment: This is a good time to compare and switch to plans with lower premiums or better coverage.
• Set up a Health Savings Account (HSA): Contribute to an HSA if you have a high-deductible health plan to save on medical expenses.
• Utilize Cost-Cutting Programs: Look into available programs for lower prescription drug costs.
• Monitor Prescription Drug Costs: Regularly review and compare drug prices, and use generic options when possible.
• Budget Wisely: Create a budget to manage rising healthcare costs and other expenses.
• Supplemental Income: Explore additional income sources like part-time work or investments to supplement Social Security.
• Monitor Legislative Changes: Stay informed about Social Security and Medicare policy updates to adjust your strategies accordingly.

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Disclosure: None. This article was originally published on Insider Monkey.