Half or More of Social Security Could Go to Retiree Health Care Costs

HealthView Services’ “2018 Retirement Healthcare Costs Data Report” shows overall in-retirement health care inflation declining to a projected 4.22% compared to the 5.47% in the 2017 Data Report. This change is primarily driven by a slower rate of increase in expected drug costs.

These developments are also accompanied by the growing popularity of shared-savings arrangements, which help to control unit-cost increases on medical services. Taken together, these changes have lowered the actuarially-projected average inflation rate for Medicare Part D to 4.5% in this year’s report from 8% in 2017. Medicare Part B is meanwhile projected to rise at 4.7% and supplemental insurance, including average annual age rating, at 5.65%.

As a result, total lifetime retirement health care expenses for an average healthy 65-year-old couple, who live to their actuarial longevity (age 87 for men and age 89 for women), retiring this year are projected to be $363,946 in today’s dollars. This includes Medicare Part B premiums, Medicare Part D premiums, supplemental insurance (Plan G), dental insurance, co-pays and out-of-pocket costs for medical care, prescriptions, dental, hearing and vision. For Medicare, supplemental insurance, and dental premiums alone, health care expenses are expected to be $281,847. Driven by the lower overall retirement health care inflation rate, these numbers are around 10% below 2017 projections.

However, the elimination of Social Security optimization strategies in 2015 has reduced potential lifetime benefits by $37,000 (in today’s dollars) for a healthy 58-year-old couple.

The Bipartisan Budget Act of 2018 added an additional Medicare surcharge bracket to Part B and Part D premiums starting in 2019. The new bracket will raise the maximum surcharge to 240% of premiums. The act also postponed the indexing of these brackets, which start at $85,000 in modified adjusted gross income for individuals or $170,000 for couples, to inflation. This was originally planned for 2020. With surcharge thresholds expected to remain constant for the foreseeable future, more retirees will be subject to them. A 38-year-old couple jointly earning $90,000, who would not previously have had to pay surcharges if indexing were to come into effect in 2020, will face $218,000 in future surcharges if they are not inflation-adjusted.

“Over the last decade the data continues to tell a consistent story—rising faster than both U.S. inflation and Social Security COLAs [cost-of-living adjustments], retirement health care costs will require a growing portion of retirees’ budgets and must be planned for,” says Ron Mastrogiovanni, CEO of HealthView Services and HealthyCapital. “We are also continuing to see cost shifting to retirees through the elimination of Social Security optimization strategies and legislative changes that will lead to higher average Medicare spending for American retirees, such as the elimination of supplemental insurance Plan F, the most popular and comprehensive plan available.”

HealthView Services’ Retirement Healthcare Cost Index, which calculates the percentage of Social Security benefits required to address total lifetime retirement health care expenses, reveals the impact of expected health care costs on retirement budgets. The index shows a healthy 66-year-old couple retiring today will need 48% of their lifetime Social Security benefits to address total lifetime health care expenses. A 55-year-old healthy couple will need 57% of their benefits to cover health care costs, and a 45-year-old couple 63%. Rising COLAs, reflecting a pick-up in consumer prices, plus lower overall health inflation, means the Index is lower than prior reports but continues to highlight the importance of additional sources of retirement income.

Retirees need to plan for health care costs increasing significantly during retirement. Although the 66-year-old couple will require 35% of their Social Security benefit at retirement for premiums, copays, and out-of-pocket costs, at age 85 these expenses will in dollar terms be 158% higher, and amount to 56% of their future projected Social Security benefits.

“A key planning challenge is to ensure retirees have the income they will need through retirement to address higher premiums and out-of-pocket expenses as they get older,” says Mastrogiovanni. “This requires new approaches to investment and decumulation strategies to specifically match health care expenses.”

The report also highlights the cost of longer-than-expected longevity and the impact of health conditions on future expenses. If a 65-year-old couple live an extra two years beyond their projected actuarial longevity, it shows they will incur an additional $37,423 (net present value) in total health care costs, excluding long-term care expenses.