How Social Security Gets Used Up on Health Care

What You Need to Know

Medicare premiums and out-of-pocket (or OOP) health care costs can quickly add up for retirees.
After OOP medical costs consumers have an average of just 75% of Social Security benefits available for spending on other items.
Retirees should make medical care a more reasonable part of a their budget and plan for other sources of retirement income.

A recent paper from the Center for Retirement Research (CRR) at Boston College by Melissa McInerney, Matthew S. Rutledge and Sara Ellen King, “How Much Does Health Spending Eat Away at Retirement Income?” examines retirees’ out-of-pocket (or OOP) health care costs versus their Social Security retirement benefits and other income.

The paper defines OOP costs as including “Medicare premiums for Parts B and D and any supplemental coverage; cost sharing for Medicare-covered services; and the full cost of services not covered by Medicare, such as dental and vision.”

These costs can add up. For example, under Medicare Part A, which covers inpatient hospital care and is financed primarily by payroll taxes, beneficiaries pay some share of the costs. Medicare Part B, which covers physician and outpatient hospital services, and Part D, which covers prescription drugs, can also include further cost sharing.

Medical Costs Are ‘Substantial’

Medicare enrollees often buy supplemental insurance coverage, including Medicare Advantage plans, which can involve additional premiums, to reduce larger OOPs. That’s a good strategy, because as the study notes, “retirees without supplemental plans face the full cost of the many services not covered by Medicare, such as dental, vision, and hearing.” (The study did not consider long-term care expenses.)

Besides Medicare Advantage plans, some retirees receive Medicare or private group health insurance from a former employer. The study sample was limited to respondents at least 65 years old who received both Social Security and Medicare benefits, but it did not include retirees who received health insurance from a current employer or spouse’s employer.