Health costs are quietly eroding retirees’ paychecks, think tank finds

Health care is claiming a large and persistent slice of retirees’ income, underscoring the pressure on clients who rely heavily on Social Security, according to new research from the Center for Retirement Research at Boston College.

The analysis focuses on retirees age 65 and older who are fully out of the labor force, receiving both Social Security and Medicare, and not covered by an employer plan. It tallies premiums for Medicare Parts B and D, Medicare Advantage and supplemental insurance, along with out-of-pocket payments for drugs, hospital and doctor visits, dental care and other services Medicare does not cover. It also excludes long-term care, so the results reflect a “typical” year rather than a catastrophic one.

Using 2018 to 2022 data from the Health and Retirement Study, the new CRR analysis finds that for the typical retiree, medical bills significantly narrow the room in the budget for everything else.

“[A]t the median, OOP medical costs – including premiums, cost sharing, and uncovered services (excluding long-term care) – leave only 71 percent of Social Security benefits available for spending on other items,” according to the report.

Not so shockingly, the burden is most acute at the lower end of the income and health distributions. The math works out brutally for 5% of retirees who have essentially no Social Security left after out-of-pocket medical costs. Even at the 10th percentile, retirees are spending all but roughly one-quarter of their benefits on health care.

Even when taking into account other income sources such as pensions, retirement accounts, and investment income, the median retiree still has only 88% of total income left after health spending, and 5% are left with about 40%.

One notable finding is how little these ratios budged during a period marked by Covid, high inflation, and rapid growth in Medicare Advantage enrollment. Real out-of-pocket spending stayed roughly flat between 2018 and 2022, suggesting health costs rose in line with general prices rather than outpacing them. That stability may not reassure clients who already feel stretched thin with the costs of living in retirement, but it does give planners a clearer baseline for stress-testing retirement budgets.

Supplemental coverage is a key differentiator. Medicaid, which often has no premiums and minimal cost sharing, leaves enrollees with the highest share of both Social Security and total income after health spending. Retirees with employer retiree health insurance have larger overall incomes and end up with a relatively high share of total income left, even though premiums take a meaningful bite. Those with no supplemental coverage avoid extra premiums, but face the full cost of uncovered services.

Looking ahead, the report flags upcoming policy changes under the Inflation Reduction Act, including a new monthly cap on insulin, the elimination of catastrophic coinsurance in Part D, and a $2,000 annual out-of-pocket cap starting in 2025, along with future Medicare drug price negotiations.

“[W]ith OOP health expenditures already eating away at retirement income, and the uncertainty from further health policy changes and Social Security drawing ever closer to trust fund depletion, it is understandable why many retirees feel that making ends meet is difficult,” the report concluded.