How Are Medicare Premium Increases Calculated?

If you are collecting Social Security and covered by Medicare, you may be wondering why your Medicare premium didn’t increase for 2010… or if it did increase, why did it – since it didn’t increase for so many others?

To understand this quandry, we need to look at the system for determining increases to Social Security benefits first.

Social Security – No COLA Increase for 2010

For the year 2010, there is no Cost-Of-Living Adjustment (COLA) in Social Security benefits.  This is reflected by the fact that the Consumer Price Index (CPI) had not increased for the year (as of May, when the figures are determined).  While the COLA figures don’t parallel the CPI exactly, the CPI is a rough guide to follow when determining increases.

This is the first time in over 30 years that there will not be a COLA – there has been an automatic increase in benefits every year since 1975.  The 2009 increase was larger than average, at 5.9%.

Impact to Medicare

So what does this mean for Medicare costs?  Well, for most folks (about 75%) receiving Social Security, part of the news isn’t all bad:  since you already receive Medicare Part A for no premium, this will not change; and your Part B premium is linked to the COLA for Social Security, so it will remain unchanged for 2010 at $96.40 per month.  What isn’t linked to COLA is Part D drug coverage, so this will likely increase for most all beneficiaries, by a factor of approximately 7% – the average monthly premium will increase by $2 a month, from $28 to $30.

The Other 25%

How can you know if you’re in the 75% that will have unchanged Medicare Part B premiums or the “other” 25%?  One of the following three circumstances puts you into the “other” 25%:

  • You don’t have Medicare Part B premiums withheld from your Social Security checks
  • You just started receiving Medicare benefits in 2010
  • You make too much money

So, what’s “too much money”?  Medicare Part B premiums start to increase when your income is $85,000 for single filers, or $170,000 for joint tax filers.  At this level, your Part B premium will increase to $110.50 per month, an increase of roughly 15% over 2009’s cost.  Incidentally, this is the same premium that you can expect to pay if your income is not the factor but rather one of the first two circumstances applies to you.

As your income increases, the Part B premium increases as well, up to $353.60 per month if your income is above $214,000 for single or $428,000 for joint filers.

Summary

All in all, this isn’t a terrible thing – of course it’s not welcome, but it could be much worse.  The decision to bypass the COLA was made in May of 2009, and inflation has been pretty much benign since then.  For the majority of Social Security recipients, the overall impact should be minimal.

This is not to downplay the significance, especially to low-income seniors who rely almost exclusively on Social Security benefits, as many other costs (energy costs, food, housing, etc.) have increased, plus the value of home real estate has decreased dramatically.  These factors taken together can have a devastating impact on folks who have no other “safety net” available to them.  If you’re not presently in the position to have these concerns, you should take this information as a warning:  it is critical to develop additional resources to be ready and available in the case that subsidized sources of income are not available or are limited when in retirement.

About the author

Jim Blankenship, CFP®, EA

Jim Blankenship is the founder and principal of Blankenship Financial Planning, Ltd., a financial planning firm providing hourly, as-needed financial planning and advice. A financial services professional for over 25 years, Jim is a CFP professional and has earned the Enrolled Agent designation, a designation that qualifies him as enrolled to practice before the IRS. Jim is also a NAPFA-registered financial advisor, which designates him as a Fee-Only Financial Advisor.

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8 Comments

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  • Carl,

    You should be able to get your premium reduced if your income has dropped enough. I’d contact Medicare and discuss your situation to see if that’s the case. It’s also possible that you might be eligible for a refund for premiums paid in 2010 if your income dropped enough.

    jb

  • Hi in 2009 I retired and with bonus, income and options I made enough to drive into paying 369.00 dollars for medicare. Do they look at my income each year and look two years back. Because my income dropped in 2010 and will drop more this year.

    Thanks Jim

    Carl

  • Natalie –

    Without seeing your return(s) I can’t say for sure if amending will help your situation out or not. From what you’ve said, it sounds like your husband earns a significant amount and that is what is impacting your benefit… and I doubt if filing MFS will resolve that issue.

    Sorry I couldn’t be of more assistance.

    jb

  • My Medicare Part B is 369.00 per month based on married filing jointly. My SSI income is only 669 per month. If I amend my prior year tax return and file as married filing separate returns can I get some of that medicare payment back. I talked to Medicare and SS and they said WE made too much money. I didn’t make anything except SS. Why are they taking so much out of my SSI, which leaves me with practically nothing.

  • Raymond:

    This is one of the effects of a Roth Conversion that most folks don’t think about… even though you do not have the money for spending, you have recognized it as income with the conversion to Roth, therefore (as you have noted) all other calculations that depend upon your income as an input, will be affected, sometimes dramatically. The income used for the calculation is typically from two years prior to the current year.

    On the other hand, in the following year when your income is back to “normal”, your Part B premium should reduce back to the standard premium.

    Hope this helps –

    jb

  • I rollover my IRA into a ROTH IRA which I paid the Taxes out of another account $39,500. My rollover increased my Income to $240,000 on my 1040 Tax Form. This in turn according to the Social Security has increased my payment to Medicare as well as my wife’s.
    Therefore I will now pay medicare Part B Premium $230.70 reducing my Social Security Check from $2,139.70 to $1,909.00. Is this correct because they said I cashed my IRA when I actually roll it over to a ROTH IRA? Thanks Ray

  • Hello, David –

    Regrettably, I don’t have an answer for you. I’ve done quite a bit of searching around for the topic and have not found any information for you. I suggest that you turn to whoever told you that you could apply for a refund – or talk to your local/state contacts.

    And if you find out something about this situation, please let me know. You can return here and post a comment with what you’ve found. In the meantime I’ll keep looking around as well.

    Sorry I couldn’t help –

    jb

  • A FEW YEARS AGO I HAD A SIGNIFICANT INCREASE IN MY INCOME FOR THE YEAR BECAUSE I SOLD A MUTUAL FUND ON WHICH I HAD A LARGE CAPITAL GAIN TO PAY DOWN MY MORTGAGE. THIS RESULTED IN A LARGE INCREASE IN THE MONTHLY PREMIUM FOR MEDICARE FOR THAT YEAR. THIS WAS A ONE-TIME EVENT AND NOT REFLECTIVE OF MY ACTUAL ANNUAL INCOME. I WAS TOLD THAT I COULD APPLY FOR A REFUND OF THE INCREASED PREMIUM I PAID FOR THAT YEAR. IS THIS THE CASE AND, IF SO, HOW DO I GO ABOUT REQUESTING TH4E REFUND?

    THANKS

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