Medicare Costs and Retirement Security

Alicia H. Munnell

IB#7-14

Introduction

Most of the discussion of retirement security focuses on declining Social Security replacement rates, modest 401(k) balances, the low level of saving, and longer life expectancy.  Rising health care costs, which seem too amorphous to incorporate into numerical examples, are often characterized as a “wildcard” that could undermine the best laid plans.  This brief focuses on just one component of retiree health care costs — the Medicare program.  It discusses the impact on future retirees of both rising out-of-pocket payments and higher taxes that will be needed to cover future health care expenditures.  The numbers come directly from the 2007 Annual Report issued by the Medicare Trustees.  The conclusion is sobering.  The growing cost and tax burdens associated with Medicare alone suggest that even the most conservative target replacement rates may be inadequate.