Medicare premiums quickly outpace Social Security COLA

Seniors expecting a boost in their Social Security checks next year may be disappointed to find that Medicare is eating up most of the increase.

That's because in 2025, Medicare Part B premiums will rise more than twice as fast as Social Security's cost-of-living adjustment (COLA). According to the Centers for Medicare & Medicaid Services, next year's COLA will be 2.5%. The standard Part B premium, meanwhile, will jump by 5.9%.

Why does that matter? Because Part B premiums are automatically deducted from Social Security checks.

"It does swallow up their COLA," said Mary Johnson, an independent Social Security and Medicare analyst. "And it causes anguish."

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Medicare provides government-funded health insurance to more than 66 million Americans. Part B of the program covers doctors' appointments and other outpatient services. Though it's part of a public entitlement, it is not free — enrollees must pay for it through monthly premiums. And those premiums are sapping the growth of Social Security.

The math is straightforward. In 2024, the average monthly Social Security check for a retired worker was about $1,900. Then subtract this year's standard Part B premium — $174.70 — and you're down to $1,725.30.

Now compare that to next year: In 2025, thanks to the COLA, Social Security benefits will rise by 2.5%. That brings the average check up to $1,947.50. But then subtract the new Part B premium — $185 — and you're left with $1,762.50.

All told, the average Social Security check next year will only grow by about $37. In an era of stubbornly elevated prices, that's a paltry adjustment.

"For someone with an SUV, that's not going to fill up their vehicle," Johnson said. 

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Or, measured another way, it may not even be enough to cover their other Medicare bills. This year, as the Inflation Reduction Act took effect, many Medicare recipients were dismayed to find that their premiums for Part D, which covers prescription drugs, had soared by more than 50%.

Financial advisors typically warn their clients not to rely too heavily on Social Security. The conventional wisdom is it should be just one third of a three-legged stool: Social Security, personal savings and a workplace-sponsored retirement plan.

But not every retiree has access to those other stool legs. According to the National Institute on Retirement Security, 40% of American seniors depend on Social Security for their entire retirement income.

"It matters to a lot of people," said Donald LaGrange, a CFP at Murphy & Sylvest Wealth Management in Rockwall, Texas. "So when the entire COLA adjustment is consumed by the increased medical insurance cost, there is no extra left for any of life's other expenses — like food, gas, shelter, travel."

Even for retirement savers with more resources, Social Security has an important advantage: It's inflation-adjusted.

"For many clients, it represents a foundational element of their retirement income," said Melissa Pavone, founder of Mindful Financial Partners in Westhampton Beach, New York. "Even for those with other sources of income … Social Security provides a reliable, inflation-adjusted stream of income that can anchor their financial plan."

Next year, however, the benefits may not quite keep up with rising prices. While next year's COLA is set for 2.5%, the consumer price index, as of October, is rising at 2.6%. Meanwhile, Part B premiums are rising at more than twice that rate.

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What can wealth managers do to help? Pavone says it's key to plan ahead, anticipating costs long before they come up.

"It's not just about helping clients maximize their Social Security benefits by choosing the optimal claiming strategy," she said. "It's also about understanding how health care costs, particularly Medicare premiums, will impact cash flow throughout retirement."

The federal government, meanwhile, could help by passing reforms to either Social Security or Medicare. Johnson isn't holding her breath.

"I hate to sound like Charles Dickens, but I have no great expectations for this Congress," she said.