The Rising Burden of Health Spending on Seniors
Thursday, February 01, 2007
by Liqun Liu, Andrew J. Rettenmaier and Zijun Wang
Table of Contents
Examining Seniors’ Personal Health Expenditures
“Seniors may spend more than one-fourth of their income on health care by midcentury.”
Table II shows the increase in seniors' total personal expenditures on health - which includes both out-of-pocket spending (including estimated premium payments for individually purchased medigap insurance) and Medicare premiums - as a percentage of total income. In addition to the out-of-pocket health care spending depicted in Figure III, seniors pay for 25 percent of Medicare Part B expenditures and 23 percent of Medicare Part D through monthly premiums. Some also purchase individual medigap insurance policies. 11 Assuming these factors remain constant, as health spending rises, the proportion of seniors' own incomes spent on their health care will also rise, and they will have to reallocate their incomes to meet their medical needs.
- Today, seniors dedicate 17.2 percent of their own cash incomes to health care spending, on the average.
- That level will grow to 23.5 percent by 2030, and reach 31.4 percent by 2050.
Thus, by midcentury, seniors will potentially spend almost one-third of their cash incomes on health care alone.
“Seniors' spending on health care amounts to more than one-third of their Social Security benefits.”
Recall from Table I that, including all the spending by third parties, an amount equal to almost two-thirds of seniors' incomes is spent on elderly health care. By this measure, in just 30 years, an amount equal to 100 percent of seniors' incomes will be spent on health care. This will undoubtedly require changes in government policy that will affect seniors' spending choices during retirement. 12
Since Social Security represents such a large portion of seniors' retirement income - particularly for older seniors - examining health spending as a percentage of Social Security benefits is also informative:
- Today's seniors spend an amount equal to 44.5 percent of their Social Security benefits on health care.
- The amount will rise to 60.9 percent by 2030 and to 81.3 percent by midcentury.
- By 2070, almost all (93.4 percent) of seniors' Social Security checks will be dedicated to spending on health and medical care.
Alternative Future Scenarios. The previous estimates assume current law related to Medicare premiums remains in effect. But, given the course of Medicare spending, it is likely the program will be changed in a way that reduces the costs for taxpayers and requires seniors to shoulder more of the burden. Further, if the cost-containment provisions of the 2003 Medicare Modernization Act come into play, policymakers may be forced to consider cutting costs and raising revenues sooner rather than later. [For more information on these provisions, see the sidebar "Pulling the Trigger on Medicare Reform."]
Since retirees will likely be called upon to share some of the growing burden of higher health care costs, Table II also presents two hypothetical cases with alternative cost-sharing arrangements. 13 In addition to the base case summarized in the first column, the other two cases assume the percentage of health spending borne by seniors increases and Medicare premiums are increased to cover a larger portion of the program's costs:
- Cost Sharing Scenario A : If seniors' out-of-pocket expenditures, which include individually purchased medigap insurance, climb to 25 percent of total health spending - and if seniors' premiums are increased to cover 35 percent of Medicare Parts B and D - seniors will spend 30.2 percent of their income on health by 2030, and 40.3 percent of their income by midcentury.
- That equates to 78.3 percent of average Social Security benefits by 2030, and 104.4 percent of Social Security benefits by midcentury.
- Cost Sharing Scenario B : If seniors' out-of-pocket expenditures as a share of total health spending climbs to 30 percent - and if sen-ior premiums are increased to cover 40 percent of Medicare Parts B and D - seniors will spend 35.8 percent of their income on health care by 2030, and 47.8 percent by midcentury.
- That equates to 92.7 percent of average Social Security benefits by 2030, and 123.6 percent of Social Security benefits by midcentury.
“Seniors will probably pay a greater percentage of the cost of health care in the future.”
Even if seniors pay a greater percentage of the cost of their health care, the taxpayer burden due to Medicare will rise. How the remaining burden will be shared between taxpayers and retirees remains an open question, but regardless of the solution, today's workers must take seriously the possibility of higher health care cost sharing as they plan for retirement. Baby boomers would do well to consider extending their time in the labor market - or saving and investing more while working - to prepare for the higher expected health care costs waiting for them in retirement.