Social Security and Medicare are large and important parts of America's safety net. About 45 million older and disabled individuals—1 in 7 Americans—are beneficiaries of both Social Security and Medicare. Social Security and Medicare account for a large amount of federal spending. For 2010, spending on the two programs is projected at about $1.2 trillion, about 35% of outlays and about 8.4% of gross domestic product (GDP), one measure of the size of the U.S. economy. Although Social Security and Medicare both play important roles in the well-being of older and disabled Americans, the interactions between the two programs are rarely examined. This report focuses on how Medicare premiums affect Social Security beneficiaries. Medicare premiums are rising faster than Social Security benefits and are consequently consuming an increasing share of benefits over time. Rising Medicare premiums could have a large effect on Social Security beneficiaries, particularly on those with low incomes and those who rely on Social Security as their primary source of income. Some beneficiaries may have more difficulty paying for rising health care costs than others. For example, among Americans aged 65 and older, 50% of married couples and 72% of unmarried persons receive more than half of their income from Social Security, and 20% of married couples and about 41% of unmarried persons receive more than 90% of their income from Social Security. Some of these beneficiaries may see a decline in their standard of living as their Medicare premiums rise. This report shows how the deduction of Medicare Part B and Part D premiums affects Social Security beneficiaries. It describes how increases in Social Security benefits and Medicare premiums are calculated under current law and explains the circumstances under which many Social Security beneficiaries are held harmless for increases in the standard Part B premium, as well as the premium assistance available to low-income beneficiaries. It shows the growth in Social Security benefits and Part B premiums in recent years and describes how rising Part B premiums have affected Social Security beneficiaries with different levels of earnings, including both current beneficiaries and new enrollees. It also provides estimates of Social Security benefits and Medicare Parts B and D premiums to 2078, using the Social Security and Medicare trustees' intermediate projections, and describes how beneficiaries would be affected by projected Medicare premium increases. Social Security provides retirement, disability, and survivors benefits to workers and their families. People become insured for benefits by working in Social Security-covered employment (i.e., by paying Social Security payroll taxes). Generally, people who qualify for retirement benefits may receive reduced Social Security benefits as early as age 62 or full benefits at the full retirement age. Those who qualify for disability or certain survivors benefits may receive them at any age. The amount of a worker's Social Security benefit is calculated by applying a progressive benefit formula to his or her lifetime earnings, adjusted for wage growth. Historically, the average Social Security benefit paid to new beneficiaries has increased at about the same rate as average earnings. After a person becomes eligible to receive Social Security benefits, his or her monthly benefit amount is increased annually to maintain purchasing power over time. Near the end of each year, the Social Security Administration (SSA) announces the cost-of-living adjustment (COLA) payable in January of the following year. The amount of the COLA is based on inflation as measured by the Consumer Price Index-Urban Wage Earners and Clerical Workers (CPI-W). If the CPI-W decreases, Social Security benefits stay the same—benefits are not reduced during periods of deflation. SSA has announced that there will be no Social Security COLA in 2010, and both SSA and the Congressional Budget Office predict that there will be no COLA in 2011. For more on this subject and how this could affect Medicare Part B premiums, see CRS Report R40561, The Effect of No Social Security COLA on Medicare Part B Premiums , by [author name scrubbed] and [author name scrubbed]. Medicare is the federal health insurance program for people aged 65 and older and for certain disabled people. Medicare is composed of four parts: Part A: Hospital Insurance (HI); Part B: Supplementary Medical Insurance (SMI), which covers physician services and other outpatient expenses; Part C: Medicare Advantage (MA), which covers the same services as Parts A and B through private health insurance plans; and Part D: prescription drugs, which are covered through private plans. Participation in Part A is required for Social Security beneficiaries aged 65 and older and for those who have received disability benefits for more than 24 months. Part A beneficiaries may choose to participate in Parts B, C, and D. Medicare is funded through a combination of payroll taxes, general revenues, and beneficiary premiums. Medicare Part A is funded primarily through the payroll taxes of current workers and their employers, which are credited to the HI trust fund. Parts B and D are financed through a combination of beneficiary premiums and federal general revenues, which are credited to the SMI trust fund. Part C is financed through the HI and SMI trust funds; Part C participants must pay the Part B premium. Because this report focuses on the payment of Medicare premiums, the analysis herein primarily relates to Parts B and D. At the end of each year, the Centers for Medicare and Medicaid Services (CMS) announce Part B premiums for the next year. The Balanced Budget Act of 1997 permanently set standard Part B premiums to cover 25% of projected per capita Part B program costs for beneficiaries aged 65 and older. If projected Part B costs increase or decrease, the premium rises or falls proportionately. Unless they qualify for low-income assistance, Part B participants must pay monthly premiums; they must also pay other out-of-pocket costs when they use Part B services. Starting in 2007, higher-income beneficiaries have paid higher Part B premiums. Less than 5% of Part B beneficiaries will pay income-related premiums in 2010. In 2010, the standard Part B premium is $110.50 per month, up from $96.40 per month in 2009. In 2010, individuals whose modified adjusted gross income (AGI) exceeds $85,000, and couples whose modified AGI exceeds $170,000, are subject to higher premium amounts, as shown in Table 1 below. The analysis in this report focuses on the standard Part B premium of $110.50, which is paid by most beneficiaries. In addition to premiums, Part B beneficiaries must also pay other out-of-pocket costs when they use services. The annual deductible for Part B services is $155 in 2010. After the annual deductible is met, beneficiaries are responsible for coinsurance costs, which are generally 20% of Medicare-approved Part B expenses. Beneficiaries who are entitled to Medicare Part A and enrolled in Part B may choose to enroll in a private health insurance plan through Part C, also known as Medicare Advantage (MA), which provides health care coverage in lieu of traditional Medicare. In 2009, about 23% of Medicare beneficiaries were enrolled in Part C, mostly in managed care plans. Medicare Advantage plans are generally required to offer the same services as Medicare Parts A and B. MA managed care organizations must also offer at least one Medicare Advantage-prescription drug plan (MA-PD) that includes drug coverage at least equivalent to standard coverage in Part D plans. (Beneficiaries enrolled in MA managed care plans may not enroll in a stand-alone Part D plan.) Medicare Advantage participants' total premium amounts may be higher or lower than the Part B premium. Although the law requires that MA participants pay the Part B premium, some plans subsidize the premium for their enrollees. Other plans require that enrollees pay the full Part B premium plus an additional premium directly to the plan sponsor. Medicare Part D was established in the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA, P.L. 108-173 ) and began covering beneficiaries' prescription drugs through private plans in January 2006. To participate in Part D, qualified individuals must enroll in a participating prescription drug plan. Unless they qualify for low-income assistance, Part D participants must pay monthly premiums; they must also pay other out-of-pocket costs when they use Part D services. MMA established guidelines for standard Part D coverage, including specific deductible and coinsurance amounts and a formula for calculating average premiums. Individual prescription drug plans are also allowed to offer alternative coverage that has at least actuarially equivalent benefits. In other words, alternative coverage plans must pay, on average, equal or greater benefits per person than standard coverage plans. Alternative coverage plans may charge higher or lower premiums, deductibles, and coinsurance than standard coverage plans. This report focuses on beneficiaries' premiums for standard Part D coverage, which vary by plan. On average, a beneficiary's premium covers about one-fourth of the value of a standard coverage plan and the federal government pays for the remaining three-fourths. The average premium for standard Part D coverage is $30 in 2010, up from $28 in 2009. The annual deductible for standard coverage is $310 in 2010. After meeting the deductible, beneficiaries pay 25% coinsurance costs for drug costs up to $2,830, all of their drug costs between $2,830 and $6,440, and about 5% of drug costs above $6,440. The analysis in this report focuses on Social Security beneficiaries who pay Medicare premiums. However, low-income individuals (including MA participants) may qualify for low-income subsidies, that cover all or part of their Part B and Part D premiums. As of early 2009, about 8.8 million low-income Medicare beneficiaries received full Part B premium subsidies, and 9.6 million receive Part D subsidies. Some beneficiaries who qualified for premium subsidies did not apply for them. To qualify for subsidies, beneficiaries must have limited income and assets.