How Much Does Out-of-Pocket Medical Spending Eat Away at Retirement Income?

Abstract

The adequacy of retirement income – from Social Security benefits and other sources – is substantially reduced by Medicare’s high out-of-pocket (OOP) costs.  This project uses the 2002-2014 Health and Retirement Study to calculate post-OOP benefit ratios, defined as the share of either Social Security benefits or total income available for non-medical spending.  The project decomposes the share of income that is going toward premium payments and services delivered and examines how these post-OOP benefit ratios differ by age, gender, income, supplemental insurance coverage, and health status. The project also updates previous studies’ estimates to document how OOP spending and the post-OOP income ratios changed following the introduction of Medicare Part D prescription drug coverage in 2006 and the closing of the “donut hole” coverage gap in 2010, which decreased OOP costs under Part D for those spending moderate amounts on prescriptions.

The paper found that:

• Average OOP spending (excluding long-term care) was $4,274 per year in 2014, with approximately two-thirds ($2,965) spent on premiums.
• In 2014, the average retiree had only 65.7 percent of his Social Security benefits remaining after OOP spending and only 82.2 percent of total income.
• Nearly one-fifth (18 percent) of retirees had less than 50 percent of their 2014 Social Security income remaining after OOP spending, with 6 percent of retirees falling below 50 percent of total income.
• Post-OOP benefit ratios increased concurrently with the introduction of Medicare Part D for retirees who lacked prescription drug coverage prior to 2006. This group also saw a small increase after the donut hole began closing in 2010.

 
The policy implications of the findings are:

• With less than two-thirds of their Social Security benefits available for non-medical consumption, and limited income outside of Social Security for much of the elderly population, many retirees likely feel that making ends meet is difficult.
• Medicare spending per beneficiary is expected to resume its decades-long rise by the end of the decade, which will put even more pressure on retirees’ budgets.