Health Costs Clip Retirees' Income: Report

"Over the last decade, much has changed for Medicare beneficiaries in ways that could affect their costs," the report states. "On one hand, some changes would tend to push down cost growth. … On the other hand, premiums in Medicare Part B have risen rapidly, driven in part by coverage for expensive prescription drugs."

One source of redress: More than half of beneficiaries are opting for Medicare Advantage coverage, and an increasing share of these plans charge no premiums. Likewise, Medicare Part D's "donut hole" has been eliminated, with more changes on tap that could further reduce the burden of prescription drugs.

However, the report notes, Americans 65 and older are coming off the highest inflation in a generation in the aftermath of the COVID-19 pandemic. With so much income going to medical costs, the authors conclude, retirees' finances are more precarious than Social Security benefit levels alone might suggest.

Questions and Considerations

Even though retirees ages 65 and older have Medicare, the report describes, they still face considerable costs.

"In the case of Medicare Part A, which covers inpatient hospital care and is financed primarily by payroll taxes, beneficiaries face cost sharing," the report states. "Medicare Part B, which covers physician and outpatient hospital services, and Part D, which covers prescription drugs, are partly financed by premiums and include further cost sharing."

Because Medicare's costs are often substantial, many enrollees buy supplemental coverage that may include additional premiums. And, as the report explains, retirees without supplemental plans face the full cost of many services not covered by Medicare, such as dental, vision and hearing.

The heart of the analysis is how this spending affects the share of Social Security benefits and total income available for non-medical expenditures, broken down for older Americans overall and by various subgroups. Additionally, the authors suggest, the relationship between supplemental coverage choices and the share of income remaining is "particularly interesting" for retirement planning purposes.

"Accounting for OOP cost burdens is important, because it is crucial to know how much retirees who rely exclusively on Social Security have remaining for non-medical spending," the report states. "In addition, understanding how benefit adequacy varies by subgroups helps identify those who may be particularly at risk. Finally, with the growing importance of supplemental insurance, participants need to understand what types of coverage are likely to leave them in the best position."

Key Findings

The report draws on the long-running Health and Retirement Study, which collects information every two years from respondents 50 and older on their financial security, work histories, medical expenditures, insurance coverage and self-reported Social Security benefits. And the data demonstrates a breadth of spending among retirees.

While the median retiree spent $5,444 on medical costs in 2022 in nominal dollars, for example, spending at the 95th percentile is more than twice as large. Premiums comprise the bulk of costs, the analysis illustrates, with the differences between high spenders and others mostly attributed to outlays for cost sharing and uncovered services.

Notably, the authors point out, out-of-pocket spending figures at the 25th, 50th and 95th percentiles stayed roughly constant in real 2022 dollars since 2018. This indicates that out-of-pocket medical spending roughly kept pace with inflation, for both premiums and other expenditures.

As noted, for the median retiree in the distribution in 2022, only 71% of the Social Security benefit remains after premiums and other health costs. This amount is again consistent over the four-year period.

"OOP spending is much more burdensome at lower post-OOP income levels," the report explains. "For example, 5% of retirees have essentially none of their benefit left after medical OOP costs. Even at the 10th percentile, retirees spend all but one-quarter of their benefit on medical OOP costs. These results demonstrate that, for a large number of retirees, OOP costs comprise a sizable share of Social Security income."

The share of total income remaining is higher, as the authors expected, but the figure varies considerably across the population. The median retiree has 88% of total income left over, for example, but 5% of the sample is left with as little as 40% of total retirement income after medical spending.

Out-of-pocket spending burdens differ according to supplemental coverage choices, the report finds. Medicaid enrollees have the highest share of income (both Social Security and total) remaining after out-of-pocket spending, which is to be expected given that Medicaid often has no premiums and minimal cost sharing.

"With respect to Social Security, surprisingly, those with just traditional Medicare appear to do the best, at least for the median retiree, followed by those with Medicare Advantage and those with retiree health insurance," the report finds. "These differences are due entirely to premiums, despite the growth in zero-premium Medicare Advantage plans. All three groups have similar Social Security income and spend a similar amount on cost sharing and uncovered services, but those with no supplemental insurance pay the least in premiums."

Demographic Distinctions

The shares of both Social Security benefits and total income remaining after out-of-pocket spending on health care changes little with age, as the report details, with a slight decline as people grow older.

"At least at the median, these numbers were very stable across the 2018-2022 period despite the pandemic more deeply affecting the oldest groups in this sample," the report notes.

In addition, the share of Social Security benefits or total income available for non-medical spending is "surprisingly similar" for retirees with and without health concerns.

"The exception arises for those never reporting a chronic condition, who have 91% of their total income remaining after OOP costs," the report finds. "This outcome occurs because their total retirement income is much higher than for those with any chronic conditions." 

The pattern across the income distribution is predictable, the authors note. That is, the share of income remaining after accounting for out-of-pocket costs rises with income.

"The highest quintile has 94% of total income remaining, even after accounting for income-related premium surcharges for Part B," the authors conclude. "The lowest quintile has 82%, which incorporates the beneficial impact of Medicaid. Excluding those who report Medicaid coverage (about half of the lowest quintile's sample), the post-OOP ratio falls to only 76%."