What the next Part B premium means for you

Every fall, two numbers come out within a few weeks of each other, and together they decide what your Social Security check looks like in January. One is the cost-of-living adjustment. The other is the Medicare Part B premium. Most of the news coverage is about the first one. The second one is where the money actually goes.

I’m not a financial advisor and this isn’t advice. But I’ve watched enough people open their January deposit and say “wait, where’s my raise?” that I think it’s worth explaining how the two fit together.

How the Part B premium gets set

Part B is the part of Medicare that covers doctor visits, outpatient care, lab work, and equipment. Unlike Part A, which most people get premium-free because they paid in while working, Part B has a monthly premium.

By law, the standard premium is set so that what people pay covers roughly a quarter of what Part B costs. The federal government picks up the rest out of general revenue. Each year, the actuaries at Medicare estimate what Part B will spend next year, do the math, and announce the new standard premium, usually in the fall. The Part B deductible gets set at the same time.

That’s why the premium almost always goes up. Health care spending goes up, so a quarter of it goes up too. Some years the jump is small. Some years it’s large. The amount announced each fall is the one to plan around, and you can find it on medicare.gov as soon as it’s out.

If your income is above the current thresholds, you pay an additional income-related surcharge on top of the standard amount. That’s a separate topic, and a big one, but the standard premium is what most people pay.

How it comes out of your check

If you’re collecting Social Security and enrolled in Part B, you don’t write Medicare a check. The premium is deducted from your Social Security benefit before the deposit hits your bank. Your statement from Social Security shows the gross benefit, the Medicare deduction, and the net amount.

This is convenient, and it’s also why people lose track of it. You never see the premium as a bill. You just see a deposit that’s a little smaller than you expected.

If you’re on Medicare but not yet collecting Social Security, Medicare bills you directly, usually every three months. Once your Social Security starts, the deduction takes over.

The hold-harmless rule

Now the piece that confuses everybody. Social Security has a rule, usually called “hold harmless,” that says your net Social Security check can’t go down from one year to the next because of a Part B premium increase.

Here’s how it plays out. Suppose the cost-of-living adjustment adds a certain number of dollars to your gross benefit. Suppose the Part B premium goes up by more dollars than that. Without the rule, your net check would shrink. With the rule, your premium increase is capped at the size of your COLA, so your net check stays flat instead of dropping.

The rule only protects people who already have the premium deducted from their check and who aren’t paying the income-related surcharge. If you’re new to Medicare this year, or you pay Medicare directly, or you’re in a surcharge bracket, you pay the full new premium regardless.

Why your COLA can disappear

Put the two pieces together and you see the problem. The COLA is a percentage of your benefit. The premium increase is a flat dollar amount, the same for everyone. If your benefit is modest, a small percentage raise might be only a few dollars a month, and a premium increase of a few dollars a month eats all of it.

In a year with a healthy COLA and a small premium bump, you feel the raise. In a year with a small COLA and a big premium bump, hold-harmless keeps your check from falling, but the “raise” rounds to zero. Meanwhile groceries, insurance, and the electric bill don’t have a hold-harmless rule.

That’s not a conspiracy. It’s two systems built for different reasons, one tied to inflation and the other tied to health care spending, meeting in your bank account. But it’s worth understanding so January doesn’t surprise you.

How to budget for it

A simple routine, once a year, around the time the numbers come out:

• Watch for the COLA announcement in October and the Part B premium announcement that follows. Write both down.
• Multiply your gross benefit by the COLA percentage to get your raise in dollars per month.
• Subtract the Part B premium increase (new premium minus old). What’s left is your real raise. If it’s negative, hold-harmless sets it to zero for most people.
• Check your Medigap, Part D, or Medicare Advantage premiums for next year, which also change and are not covered by hold-harmless.
• Plan on the net number, not the headline percentage, when you set your monthly budget.

Social Security mails a notice each December showing your new gross benefit, the new Medicare deduction, and the net. You can also see it in your account at ssa.gov. If the numbers don’t match what you worked out, call Social Security and ask them to walk through it.

The premium is going to come out either way. Knowing the amount before January just means it’s your plan, not a surprise.