NCPA - National Center for Policy Analysis

MEDICARE TO SQUEEZE RETIREMENTS

June 18, 2008

Medicare premiums may soon start crushing retiree spending power.  According to columnist Scott Burns, many long-lived couples may need to reduce their retirement spending on nonmedical consumption by 13 percent to 26 percent to avoid sharp declines in purchasing power as they get older.

Here are the facts:

  • Since 1965, the year Medicare was created, the consumer price index has risen at a 4.5 percent annual rate.
  • The Medicare premium has inflated at an 8.4 percent rate over the same period and this gap appears to be growing.
  • Between 2000 and 2008, the monthly Medicare premium grew from $45.40 to $96.40; that's a 9.9 percent annual rate of increase.
  • During the same eight-year period, the consumer price index rose at only 2.8 percent a year.
  • So Medicare costs are now rising 7 percent a year faster than the general inflation rate.

Burns examines the impact of these rising costs on a hypothetical couple approaching retirement.  For example: If Medicare inflation continues to run 7 percent faster than inflation, the couple's spending power drops from $24,460 a year to $21,289 a year, a reduction of 13 percent.

While a portion of the reduction will come from a slowly increasing federal income tax bill, most of the reduction will be due to rising Medicare Part B premiums.  Since the growth of Medicare Part B premiums is likely to be paralleled by the growth of premiums for Medigap policies (which often cost about as much as the Part B premium), the lifetime loss of living standard over a long retirement is likely to be about 26 percent, says  Burns.

Unfortunately, the younger a person is, the greater the impact of rising Medicare premiums because the premium is rising faster than both wages and Social Security benefits, says Burns.

Source: Scott Burns, "Rise in Medicare Premiums To Cut Retirees' Spending," the Dallas Morning News, June 15, 2008.

 

Browse more articles on Economic Issues