Yesterday and Today

“What’s with all of this health care cost anxiety?” some of my friends have been asking me lately. “My parents never worried about paying for health care in retirement. It wasn’t a financial burden to them.”

Let’s begin our analysis by comparing the Greatest Generation to today’s Baby Boomers with one key question in mind: Can future retirees replicate the financial comfort level of the previous generation?

The following information outlines several important generational differences. (For comparison purposes, let’s assume that the Social Security Trust Fund will remain solvent, and we will not experience a reduction in benefits.)

Greatest Generation

Baby Boomers

Pension and Social Security

Social Security

Basic Medicare

Basic Medicare

Employer’s MedSup

MedSup and Drugs

Paid off Mortgage

Multiple Mortgages

Paid off Credit Cards

High Credit Card Debt

Modest Lifestyle

Affluent Lifestyle

I’m not going to delve into lifestyle comparisons between Boomers and previous generations. Instead, I will focus on Americans’ primary retirement income source (Social Security) and projected health care costs.

On the income side of the ledger, most members of the Greatest Generation entered retirement with savings, Social Security income, and a pension.

The majority of Baby Boomers, as well as subsequent generations, will likely retire without the comfort of a pension and have to rely exclusively on savings and Social Security. Combine this with longer life expectancies (not to mention Social Security’s shift of Full Retirement Age from 65 to either 66 or 67) and retiree income may become stretched.

Unfortunately, the proverbial “straw” that breaks the retirement budget will come in the form of Social Security Cost of Living Adjustments (COLAs).

From 1975 to 2008, COLAs increased, on average, around 4.5% annually. However, COLAs dropped to an average of 1.4% from 2009 to 2014. Analyzing current data, we project COLAs to increase by approximately 2% annually into the foreseeable future.

Let’s examine the long-term impact of a 2.5% differential in COLAs.

Based on the 4.5% growth rate, a retiring 66-year-old couple expecting to earn $25,332 (approximate 2014 average Private Insurance Amount) would generate a total of $1,143,699 in lifetime benefits. If we calculate using a 2% annual COLA increase, the couple’s Social Security income will total $826,921 – a difference of $316,778.

Migrating to the expense side of the ledger, let’s add another straw and focus on health care costs.

Today’s retirees will be responsible for Medicare Parts B (doctor visits and tests), D (prescription drugs), supplemental insurance premiums, and all other out of pocket expenses. Why does this matter? Well, retirees the Greatest Generation like my mom and dad (and probably yours) did not have to pay for Medicare Part D and supplemental insurance premiums. Those expenses were managed through my father’s employer-sponsored retirement benefits package because he worked for his company for over thirty years. (To be accurate, Medicare Part D was actually imbedded in many supplemental policies prior to 2007.)

So how do we quantify this? A couple retiring today would need to generate an additional $276,180 for prescription drug and supplemental insurance premiums (in real dollars). Add this to the income gap caused by reduced Social Security COLAs, and the total is $592,958. Using a 20-year time frame, today’s retiring couple will experience the weight of a $29,648 annual difference in disposable income in comparison to a couple from the Greatest Generation.

That’s not all.

Historically, health care costs have increased annually by approximately 6%, and we expect this trend to continue into the foreseeable future.

So is inflation a wash? Not really.

In the past, COLAs trailed health care inflation by approximately 1.5%, so paying for health care did consume some of that COLA growth in income, but not that much. However, looking to the future, health care costs are expected to grow at a rate of 4% more than Social Security COLAs. So, regardless of overall inflation in the U.S., Social Security income is expected to grow at a rate 4% less than the cost of health care.

Let’s summarize: A $316,778 shortfall in Social Security income, plus $276,180 in additional insurance premiums, combined with health care expenses growing at a rate of three times Social Security income will have an impact on many retirement budgets.

So for those who believe that I may be “crying wolf” in regards to retirement health care, I’ve provided a basic cheat sheet to show why the past is not an accurate barometer for the future.

Greatest Generation

Baby Boomers and Beyond

Many retire with pensions

Very few will retire with pensions

4.5% Social Security COLAs

2% Social Security COLAs

Employer Paid Medicare Part D & MedSup Plan

Responsible for Medicare Part D & MedSup

Annual health care inflation was 1.5% more than

Annual health care inflation will be 4% more than

No means testing for affluent retirees

Means testing surcharges for affluent retirees could increase premiums by up to 200%

There are some lessons that we can learn from the Greatest Generation: pay off the mortgage before retirement, eliminate credit card debt, and live within our means are a few that come to mind. Maybe one vacation per year is all we need.

If you would like to learn more about this topic – including health care savings strategies – please join our Retirement Week webinar on health care expenses, April 16 at 2:00 pm EDT.
Sign up here.