Average retiree health costs could overtake Social Security benefits

Retirement health care could reach 98% of Social Security in 10 years, new index finds

By Mary Beth Franklin

Apr 17, 2014 @ 12:01 am (Updated 12:26 pm) EST

Social Security, Medicare, retirement health care costs, retirement benefits,

Average health care costs for middle-income retirees are on a path to exceed their Social Security benefits, according to a newly created Retirement Health Care Cost Index.

The index devised by HealthView Services, a provider of Medicare, Social Security and long-term-care planning tools, measures the percentage of Social Security benefits required to pay for health care-related costs in retirement for a healthy couple receiving the average expected Social Security benefit at full retirement age.

Retirement health care costs will increase from 69% of Social Security benefits for a couple retiring next year to 98% of Social Security benefits for a healthy couple retiring 10 years from now, according to the index. For couples retiring two decades from now, the gap will be even more dramatic. They would need 127% of average Social Security benefits to cover their health care costs in retirement.

“The index reveals an ugly truth that will come as a shock to many: Over the course of time, retirees will need to use their entire Social Security benefit just to pay for health care,” said Ron Mastrogiovanni, founder and chief executive of HealthView Services. “Many Americans believe that Medicare will cover most or all of their health care costs in retirement. This is simply untrue.”

Total retirement health care costs measured by the index include all Medicare premiums, including Parts B and D, and Medigap premiums, as well as out-of-pocket costs, including co-pays not covered by Medicare. The index assumes that the primary income earner will generate the Social Security average of $1,294 per month in today's dollars and $817 per month for the lower-earning spouse. The index measures the lifetime average of health care costs, which tend to increase as retirees age.

For an average healthy couple retiring next year, HealthView Services' data shows retirement health care costs will amount to about $366,600 in today's dollars. In another 10 years, costs will rise to approximately $421,000 in today's dollars, reflecting estimated health care cost inflation and expected Social Security annual cost of living adjustments.

The gap between estimated health care cost inflation of 5% to 7% per year and the 2% in expected annual cost of living increases in Social Security benefits means any Social Security increases will likely go to future retirees' health care costs.

“For middle-class Americans who tend to rely more on Social Security benefits, the differential between the health care cost inflation rate and Social Security cost-of-living adjustments is a time bomb,” Mr. Mastrogiovanni said. “The index highlights the need for a comprehensive and individualized approach to retirement planning that factor in expected health care costs.”

Some wealthier couples will need a smaller portion of their Social Security benefits to cover their health care costs. But once a couple's modified adjusted gross income tops $170,000 per year — the trigger for Medicare premium surcharges — their out-of-pocket health care costs can skyrocket.

A healthy couple retiring next year with one spouse earning maximum Social Security benefits but with a total income under $170,000 would need 39% of their Social Security benefits to cover their health care costs. That portion would rise to 52% for a couple retiring 10 years in the future.

But if that same couple earns more than $170,000 in retirement, their Medicare surcharges for Parts B and D premiums could increase by between 35% and 200%. An affluent couple retiring in one year who fall into Medicare's top income bracket will be responsible for an additional $255,267 in lifetime Medicare surcharges.

The index “reinforces the need for adviser tools that demonstrate decumulation strategies, including working longer, saving more, moving to a less expensive state, and optimizing Social Security benefits that can impact retirement plans," Mr. Mastrogiovanni said.

HealthView Services' HealthWealthLink is an integrated retirement planning tool that draws upon cost data from more than 50 million annual health care cases to help financial advisers prepare personalized estimates of retirement health care costs and to implement various drawdown strategies to achieve clients' retirement goals. Individuals can use a one-click version of HealthWealthLink to calculate average retirement health care costs.