Report Shows New Prescription Drug Law Would Lead to Social Security Cuts

Just before the August recess, House and Senate Democrats introduced legislation to protect Social Security cost-of-living adjustments (COLAs) from being dramatically reduced or even eliminated as a result of last year's prescription drug legislation.

Approximately 30 million middle income seniors are enrolled in Social Security and Medicare, and rely on the annual Social Security cost of living increases that help them keep up with the rising cost of groceries, food, and housing. Yet medical inflation is rising rapidly, and Medicare premium increases will eventually consume the entire Social Security COLA. If nothing is done, escalating drug prices will lead to real cuts in the Social Security benefit as a result of new Part D premium increases in 2007 and beyond.

Social Security COLAs are vital to seniors and the disabled. Millions of Americans rely on their Social Security check each month to make ends meet. Each fall, millions of retirees wait anxiously to learn what the Social Security COLA will be for the coming year - because each dollar is needed to balance their budget.

Medicare bill will dramatically reduce Social Security COLAs. Under the new prescription drug law, some seniors will have an additional Medicare premium ("Part D") deducted from their Social Security check. With both the new Medicare Part D premium (for prescription drugs) and the existing Part B premiums (for physician and other outpatient care) deducted from a retiree's Social Security check, Social Security COLAs will be significantly eroded. According to a new report by the Democratic staff of the Joint Economic Committee, when the new drug benefit is in place in 2007 almost one-quarter of Social Security beneficiaries will spend over 25 percent of their COLA just on increases in Medicare premiums - and

the number will increase to 64 percent (22 million seniors and people with disabilities) in 2014. For an elderly woman with a monthly benefit of $500, the increase in Medicare premiums will absorb almost 60 percent of the COLA from 2007-2010, and 69 percent from 2011-2014.

Making a bad problem worse. The goal of the Social Security COLA is to maintain the purchasing power of the benefit check in the face of rising prices. But that objective is undermined if Medicare premiums, which are typically deducted from Social Security checks, increase rapidly. Medical inflation and increased utilization of outpatient services is already increasing Part B premiums, but current law ensures at least that total Social Security benefits do not go down. By refusing to extend this same protection to the new Part D premiums, and refusing to control drug prices, Republicans have made a difficult situation even worse. While the Social Security COLA only increases at the rate of inflation, the premiums beneficiaries face under Part D will increase by the rate of increase in drug prices. According to CBO projections, Part D premiums will increase by an average of 7.5 percent a year from 2006 to 2014 - a far greater rate of increase than that expected for Part B or the Social Security COLA.

Current protection needs improvement. The 2004 Medicare Trustees Report projects that monthly Part B premiums will rise by a record $11.50 for 2005 - a one-year increase of morethan 17 percent. Given the increased pressures to increase physician payments and the trend of shifting more services to outpatient settings, which increase Part B premiums - and the new costs of Part D - it is important to act now to protect a portion of the COLA for seniors' basic needs.

Democrats' bill will protect Social Security. Democrats' "Social Security COLA Protection Act of 2004" would ensure that no more than 25 percent of a beneficiary's annual COLA could be taken away by increases in Medicare premiums. Doing so would guarantee that seniors and the disabled retain at least 75 percent of the COLA to cover price increases in other goods and services, such as food, clothing, housing and energy costs. In 2007, the legislation would help over 14 million Social Security recipients. By 2014, it will help more than two-thirds of seniors and people with disabilities, approximately 23 million Americans.