Q: How does the government determine cost-of-living adjustments, or COLAs, for Social Security?

A: Since 1978, the annual Social Security COLA has been determined by the Consumer Price Index for Urban Wage Earners and Clerical Workers. This CPI-W is measured every month by the U.S. Bureau of Labor Statistics, which uses a collection of information about consumer transactions in 87 urban communities nationwide. Experts disagree on whether the CPI-W overstates or understates prices, though its technical aspects are based on accepted statistical procedures. More information about how the CPI-W is calculated is available at http://www.bls.gov/cpi/cpifaq.htm.

There was no Social Security COLA in either 2010 or 2011 because there was a decrease in the CPI-W. This had happened only once before, during the 1980s. Conversely, in 2009, Social Security beneficiaries received one of the largest COLAs ever. Next year, because of the increase in the CPI-W, Social Security beneficiaries and Supplemental Security Income recipients will receive a 3.6 percent COLA, increasing their benefits.

Also as a result of the higher inflation index for 2012, starting in January, workers will pay more into the Social Security system. Workers pay a 6.2 percent Social Security tax on wages, which is matched by employers. The tax rate for workers was reduced to 4.2 percent for 2011. That payroll tax holiday is scheduled to expire at the end of this year. Workers currently are taxed on earnings up to $106,800. Next year, wages up to $110,100 will be subject to the Social Security tax. The SSI program is funded by general revenues, not the Social Security tax.

Q: How is this connected to how much seniors pay in Medicare Part B premiums?

A: By law, 25 percent of the costs of Medicare Part B, which covers doctor visits, must be paid by Medicare beneficiaries. The remaining 75 percent is funded by taxpayers out of general revenue.

Most Medicare beneficiaries receive Social Security payments, and their Part B premiums are deducted from their Social Security checks. A hold-harmless provision in the Medicare law means that most Social Security recipients do not have to pay a higher Part B premium when there is no Social Security COLA. Three groups of Medicare beneficiaries are not covered by this hold-harmless provision. They are very low-income beneficiaries whose Part B premiums are paid by the Medicaid program, high-income beneficiaries who are subject to income-related Part B premiums, and beneficiaries who do not receive Social Security benefits (mostly former state or local government workers who opted out of Social Security). So, since 2009, in the absence of a Social Security COLA, these three groups of Medicare beneficiaries have paid Part B premium increases. Additionally, the hold-harmless provision protects only existing beneficiaries from an increase in premiums and doesn’t guarantee new enrollees the same premiums as existing beneficiaries. Medicare beneficiaries who enrolled in 2010 and 2011 paid Medicare premiums slightly higher than the average beneficiary based on 25 percent of Medicare Part B costs at the time of their enrollment.

Medicare Trustees indicated in May that Part B premiums will change for 2012. Premiums are projected to increase slightly for most beneficiaries, but the official announcement is yet to be made. At the same time, some Medicare beneficiaries will see a slight decrease in their Part B premiums since all beneficiaries will now participate in covering 25 percent of Part B program costs, unlike the last two years when there was no Social Security COLA. Higher-income Medicare beneficiaries will continue to pay 35 percent, 50 percent, 65 percent or 80 percent of their Medicare Part B costs, depending on their specific income levels, instead of the standard 25 percent.