One of the most subtle yet dynamic variables that contributes to rising medical expenses is health care inflation, which is projected to grow between 5% and 6% annually for the foreseeable future – more than twice the historic rate for Social Security cost of living adjustments (COLAs). The compounding effect of this differential over the next 20 years, combined with legislative changes that are shifting costs back to subscribers, means that retirees on fixed budgets will have a difficult time generating enough additional income to keep up with retirement medical costs.
To put this into context, let’s examine some statistics from last year’s “Health Care Cost Data Report.”
A 65-year-old individual retiring in 2016 would face than $33,000 in total retirement health care costs than a person who retired in 2015 because of the 7.3% year-to-year rise in health care inflation. (Note that this increase was primarily driven by the 16.1% jump in Medicare Part B premiums.)
On top of that, there was no Social Security COLA in 2016, which means that tens of millions of Americans had to absorb increased health care costs with no additional income. COLAs are expected to remain half of the retirement health care inflation rate for the next decade. Because COLAs will fail to keep up, the compounding effect of this differential will squeeze retiree budgets.
Retirement Health Care Cost Index
Let’s take a moment to examine HealthView’s Retirement Health Care Cost Index, which will illustrate the impact of health care inflation on Social Security benefits.
Table A examines a 66-year-old couple receiving average Social Security benefits based on a Primary Insurance Amount (PIA) of $26,544 per year. The chart reveals (in five-year increments) that because of health care inflation, Medicare premiums will consume, on average, 40% of the couple’s total Social Security income at age 70 – and up to 75% per year by age 87.
TABLE A: ANNUAL PROJECTED COSTS VS. SOCIAL SECURITY COLAS
(In Future Dollars Based on Social Security Trustee Projection for Annual COLA Increase)*
|Age||Annual Health CareCosts (in Future Dollars)||Social Security||Annual Difference||Percent of Social SecurityDedicated to Health Care Costs|
*Data is based on this couple optimizing Social Security benefits at their full retirement age.
As stated earlier, health care inflation is expected to outpace Social Security COLAs for the foreseeable future. This compounding effect of this differential means that over time, medical-related outlays may slowly exceed gross Social Security income.
When this couple is 87 years old, health care costs will equate to approximately 75% of their gross Social Security benefits. This is certainly troubling for anyone near retirement age, but may have even greater implications for workers in their forties and fifties because a longer time horizon to retirement will create a larger differential between health care inflation and COLAs.
Ultimately, if these projections are correct, in the coming decades, many retired Americans could eventually see their Social Security income completely absorbed by health-related expenditures.