How Social Security Gets Used Up on Health Care

A recent paper from the Center for Retirement Research (CRR) at Boston College by Melissa McInerney, Matthew S. Rutledge and Sara Ellen King, “How Much Does Health Spending Eat Away at Retirement Income?” examines retirees’ out-of-pocket (or OOP) health care costs versus their Social Security retirement benefits and other income.

The paper defines OOP costs as including “Medicare premiums for Parts B and D and any supplemental coverage; cost sharing for Medicare-covered services; and the full cost of services not covered by Medicare, such as dental and vision.”

These costs can add up. For example, under Medicare Part A, which covers inpatient hospital care and is financed primarily by payroll taxes, beneficiaries pay some share of the costs. Medicare Part B, which covers physician and outpatient hospital services, and Part D, which covers prescription drugs, can also include further cost sharing.

Medical Costs Are ‘Substantial’

Medicare enrollees often buy supplemental insurance coverage, including Medicare Advantage plans, which can involve additional premiums, to reduce larger OOPs. That’s a good strategy, because as the study notes, “retirees without supplemental plans face the full cost of the many services not covered by Medicare, such as dental, vision, and hearing.” (The study did not consider long-term care expenses.)

Besides Medicare Advantage plans, some retirees receive Medicare or private group health insurance from a former employer. The study sample was limited to respondents at least 65 years old who received both Social Security and Medicare benefits, but it did not include retirees who received health insurance from a current employer or spouse’s employer.

Among the key findings:

• After OOP medical costs, including premiums, cost-sharing, and uncovered services, consumers have an average of just 75% of Social Security benefits available for spending on other items.
• Premiums for Medicare Parts B and D, Medicare Advantage, and supplemental plans comprise the bulk of medical spending for most retirees.
• OOP spending has a bigger impact on women and those in low-income households/

These statistics are alarming, but add in rising Part B premiums — 14.5% in 2022 — and “it is understandable why many retirees likely feel that making ends meet is difficult,” the authors write.

“While we knew that medical costs could be substantial, I don’t think we quite grasped the extent to which they might use up so much of retirees’ ‘fixed income’,” says Rutledge, an associate professor at Boston College and a research fellow at the CRR. “The fact that the top 5 percent of spenders have basically nothing left from their Social Security benefit (after medical OOP) is alarming.

“The picture is somewhat better comparing medical spending to total retirement income rather than just Social Security benefits,” he adds. “But if 401(k)s are not fully replacing traditional pensions for the people who are just starting to reach retirement, that would mean Social Security is going to be the bulk of retirement income for the next generation, and then we’d be back to the alarming picture.”

From a retirement advisor’s perspective, a key takeaway from the research is the importance of retirees having income sources beyond Social Security with the goal of making medical care a reasonable part of a retiree’s budget.

“Also, retirees eligible for Medicaid coverage to supplement Medicare should definitely take advantage of that option,” Rutledge adds. “That’s especially the case for the one big medical spending category we did not investigate in depth in this project: long-term care, where Medicaid pays the majority of U.S. spending.”

Ed McCarthy is a freelance financial writer who holds the certified financial planner and retirement income certified professional designations.