The rising cost of out-of-pocket medical expenses for retirees is significantly eroding the safety net of Social Security benefits, according to the Center for Retirement Research at Boston College.

The study found that premiums, copays and uncovered costs have risen to the point that a typical retiree is spending 25% of their Social Security income on these nondiscretionary expenses. Of course, many retirees have additional forms of income besides their Social Security benefit—such as investments, pensions and 401(k)s—but even then, roughly 12% of total income goes to cover these out-of-pocket (OOP) medical exenses, the study found. 

“I think it would be fair to say we knew that medial costs would be really substantial, but we didn’t sense how much of retirees’ income they were taking up,” said Melissa McInerney, lead researcher of the recent brief, "How Much Does Health Spending Eat Away at Retirement Income?" “This really shows the importance of having other forms of income other than just Social Security.” 

The research behind the brief was spurred by the 14.5% increase in 2022's Medicare Part B premium that all but wiped out a 5.9% Social Security cost-of-living increase. "It is understandable why many retirees likely feel that making ends meet is difficult,” McInerney concluded with her colleagues, Matthew Rutledge and Sara Ellen King.

The researchers used the data in their 2018 study of 5,340 retirees to calculate the share of Social Security benefits and total income that is available for non-medical spending, such as food, housing, transportation and utilities, with breakout data for gender, age, health status, income, and supplemental insurance coverage. It excluded the cost of long-term care, which can be substantial, in order to focus on the impact of OOP spending in a typical year.

“With a substantial portion of their income going to medical costs, retirees’ finances are more precarious than Social Security benefit levels alone might suggest,” the team wrote.

While most retirees over 65 are covered by Medicare, Part B and Part D (which cover physician and outpatient hospital services, and prescription drugs, respectively) are paid for by the retiree through both premiums and further cost-sharing, such as co-pays and uncovered expenses. And because Medicare’s OOP expenses can be significant, many retirees also buy supplemen­tal insurance coverage, such as Medicare Advantage, which requires additional premiums. If they don’t, they face those OOP expenses and the full cost of services not covered by Medicare, such as dental, vision and hearing.

Throw all the costs together and the typical retiree spends $4,311 a year, while a retiree at the higher-end of costs spends $10,947, according to the report.

Netted against Social Security benefits alone, typical retirees have 75% of their benefit left over for all other expenses, while the retiree at the higher end of costs has just 11% remaining. That's often because retirees at the higher end also faced chronic illness during their earning years, which translate to lower earnings that in turn translated to a lower Social Security benefit, the report said.

The retirement picture was less bleak when total income was considered. In this scenario, the typical retiree had 88% of total income remaining after medical expenses, the study showed. For retirees in the top 25% of total income, OOP expenses amounted to just 6% of income.

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