Falling Medicare Costs and a Big Social Security COLA? Don't Get Too Excited
The author sees 2023 as an outlier, and an opportunity.
The 2023 Social Security cost-of-living adjustment (COLA) announcement was welcome news for clients and advisors in the midst of turbulent financial markets.
The 8.7% increase in Social Security benefits will bring much needed additional cash to retirees facing higher prices across the board.
But, as advisors know all too well, one year does not a trend make.
In fact, it’s important to note that this change is an outlier. The COLA increase is the largest in 40 years, reflecting current four-decade high inflation.
The 3.1% decline in Medicare Part B physician and outpatient services plan premiums is only the third decrease in the history of the program.
Lower-than-expected costs to the Medicare program for the Alzheimer drug Aduhelm, when compared to projections for 2022, is the primary, and one-time, reason for this.
Long-term projection data from the Social Security Administration and Medicare underscore the trend advisors and clients need to keep focused on: Medicare premium increases are, over at least a 10-year time horizon, projected to rise by more than two times expected COLAs.
This means retirees’ budgets will be squeezed by rising health care expenses progressively, through retirement.
Putting the annual Medicare Part B premium decline of $62.40 into context, it will amount to less than 1% of expected 2023 retirement health care costs for an average healthy 65-year-old retiring next year — as we detail in our most recent analysis of this topic.
Total costs include Medicare Part B premiums, Medicare Part D prescription drug coverage premiums, and supplemental insurance premiums, along with all other out-of-pocket health-related costs retirees can expect to incur.
Our projections draw on government data and claims from 530 million actual health care cases to actuarially determine reasonable expectations for all expenses, including out-of-pocket spending in retirement related to dental, eyecare, and hearing.
Our Retirement Healthcare Cost Index — which measures total retirement health care costs as a portion of Social Security benefits — frames the key retirement planning challenge: Long-term projections show Medicare Part B premiums rising 5.9% per year and supplemental insurance premiums rising 8.6% per year, including the effects of age rating. That will significantly outpace the expected 2.4% COLAs.
Our data show health care costs will increase from 45% of gross Social Security benefits at the start of retirement for a healthy average 65-year-old couple retiring in 2023 to close to 100% if they both live to 89.
The changes to COLAs and Medicare premiums in 2023 present an opportunity for advisors to engage with clients to provide value-added insight and perspective around Social Security benefits and health care costs required for the long-haul challenge of a 20-plus-year retirement.
Even if inflation remains stubbornly high for the next year, future long-term Medicare premiums will continue to outpace Social Security benefit increases.
Helping clients better understand the interrelationship between annual Social Security benefits and lifetime health care costs, as well as the distribution curve related to this expense, provides an opportunity to discuss savings and investment solutions to meet their decumulation needs during retirement.
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(Image: David Palmer/ALM)