Health Care Expenses to Outpace Inflation — Forever?

By Ted Godbout • September 21, 2017 • 0 Comments
A new report indicates that retiree health care expenses will not only continue to increase, but will do so at triple the current rate of inflation for the foreseeable future.

That unsettling news comes from HealthView Services’ 2017 Retirement Health Care Costs Data Report, which shows that retiree health care expenses will rise at an average annual rate of 5.47% for the foreseeable future — almost triple the U.S. inflation rate from 2012-2016 (1.9%), and more than double annual projected Social Security cost-of-living adjustments (2.6%). And long-term care expenses are not factored into those cost estimates!

According to the report:

  • Total projected lifetime health care premiums (Medicare Parts B and D, supplemental insurance and dental insurance) for a healthy 65-year-old couple retiring this year are expected to be $321,994 in today’s dollars ($485,246 in future dollars). However, when you add in deductibles, copays, hearing, vision, and dental cost sharing, that number grows to $404,253 in today’s dollars ($607,662 in future dollars).

  • Medicare Part B premiums grew by 16% in 2016, though the report’s authors note that the Medicare Board of Trustees originally projected a 24% Part-B decrease for 2017. The Trustees estimate a 1.3% decrease in 2018.

  • The average cost of supplemental insurance will rise at 7.12%, driven by annual projected premium inflation of 3.80% and an additional annual age-based increase of 3.32%.

HealthView’s Retirement Health Care Cost Index suggests that a 66-year-old couple retiring this year will require 59% of their Social Security benefits to cover total retirement health care costs (versus 57% a year ago). A 55-year-old couple will need 92% of the Social Security benefits, and 45-year-old couple, 122%.

Women will, of course, face higher lifetime health care costs because they will live, on average, two years longer than men. Expected health care costs (for Medicare Parts B and D, a supplemental insurance policy and all out-of-pocket health care expenses) for a healthy 63-year-old woman retiring this year (living to age 89) are projected to be $362,607 (in future dollars) – 29.9% more than a 65-year-old male ($279,176).

Retirement Savers Better Off

While the report cautions that health care will be one of the most significant retirement expenditures, it notes that the savings required to cover this expense may be modest – especially if one has been utilizing an income replacement ratio (IRR) of 75% to 85%.

The report points out that since most Americans are only paying 25% of their health care premiums when working, IRRs typically only include this measure in health-expense calculations, and that those IRRs also generally assume that future household expenses, including health care, can be projected using an average U.S. inflation rate of 2.5% to 3% – though, as noted above, this falls short of the 5.47% projected retirement health care inflation rate. Still, the report notes that regardless of how much health care costs are integrated into an IRR, Americans who consistently invest in an IRR-based plan are in far better shape than those who do not, because they are setting funds aside for retirement, and those balances are compounding over time.

The report also points out that Americans do have the power to potentially reduce costs by changing behaviors and committing to a long-term savings plan. The report includes a case study of a 50-year-old male with type II diabetes, and says that if he were to follow doctor’s orders he could potentially add eight years to his life expectancy and generate an additional average of $16,974 in annual retirement income, depending on age and health conditions.

Other Data

A recent report from Fidelity notes that the average amount a 65-year-old couple retiring this year will need to cover medical expenses (in today’s dollars) throughout retirement would be $275,000, a 70% increase since their initial retiree health care cost estimate in 2002. The nonpartisan Employee Benefit Research Institute (EBRI) notes that in 2016 a 65-year-old man would need $72,000 in savings and a 65-year-old woman would need $93,000 if each had a goal of having a 50-50 chance of having enough savings to cover health care expenses in retirement. If they wanted to boost those odds, say to a 90% chance of having enough savings, the man would need $127,000 and the woman would need $143,000.