As health care costs continue to rise at a faster annual rate than Social Security payments, and lifespans continue to lengthen, the need for retirees to establish an additional source of guaranteed lifetime income outside Social Security has never been greater.
Health Care Costs Increase Over Time.
In order to show what proportion of the budget a couple’s health care costs might consume as they age, we conducted an analysis using a hypothetical couple relying entirely on Social Security for their income and enrolled in Medicare Parts B and D.
Both spouses retired at their full retirement age of 66 in 2021. His salary on retirement was $60,000 and hers was $50,000, nicely bracketing the 2021 median income of $56,650 for American workers ages 55-64.1 Using the Social Security Quick Benefit Estimator,2 we can estimate his monthly Social Security benefit of $1,570 and hers of $1,398 for 2021, generating a monthly household income of $2,968 during that year.
Each spouse paid the standard monthly premium of $148.50 for Medicare Part B, and $31.47 for Medicare Part D in 2021.3,4 We’ll also assume they paid the average out-of-pocket annual dollar amount that Medicare beneficiaries spend on health care. That amount was $5,460 ($455 per month) per person in 2016, and it included Medicare premiums and deductibles, as well as costs of additional medical insurance such as a Medigap plan, plus expenses for over-the-counter health care, eye care, hearing aids, dental care, and long-term care, none of which are covered by Medicare.5,6 Subtracting their Medicaid premiums from that monthly figure leads to an extrapolated non-premium monthly health care expense of $275 per person, or $550 for their household, and for simplicity’s sake we’ll just use that uninflated 2016 figure as their 2021 amount.
Our model shows that during 2021, this hypothetical 66-year-old newly retired couple will be paying about 30% of their income toward health care expenses, with 12% alone going toward Medicare premiums. We can get a rough idea of how the numbers might change over time by applying projected annual increases to them.
Our couple’s income will rise with the annual cost-of-living adjustments (COLAs) for Social Security, which have averaged 2% over the past 20 years, though in some years there has been no increase.7 Let’s assume that average 2% annual increase continues through the year 2040, when the couple turns age 85. At age 85, their total monthly household income under this assumption will have increased to $4,324.
Their Medicare premiums can be expected to rise at a faster annual rate. During the years 2010 - 2020, Medicare premiums rose an average of 4.05% per year.8 If we apply the annual 4.05% increase to our couple’s premiums, then by 2040 the proportion of their monthly income spent on Medicare premiums will have risen from 12% to 18%.
Note that the "hold harmless" clause, which limits a Social Security beneficiary’s Medicare premium increase to less than the dollar amount of their Social Security increase, will never kick in for this particular couple, as their Medicare premium increases under these assumptions stay well below their Social Security increases.9
Meanwhile, the U.S. Centers for Medicare and Medicaid Services (CMS) projected that prices for medical goods and services will rise at an average rate of 2.4% per year during 2019-2028,10 so we can hold that assumption steady through the year 2040 to get a projected monthly non-premium healthcare cost of $863 in that year for our fictitious household.
These rough calculations show that, by the time these two people reach age 85 in the year 2040, they will be spending $1,628 every month -- nearly 40% of their household income -- on health care costs.