Social Security, which provides income to retired workers in order to help them meet their monthly expenses, is typically seen as the most important social program for seniors. It's easy to see why, given that Social Security pays out a cash benefit each and every month for the rest of your life.
But let's not forget about Medicare.
In terms of lifetime benefits paid, Medicare is quickly catching up to Social Security. The program, which is designed to pay for a large portion of the eligible medical costs of seniors aged 65 and up, is paying out more every year due to three major shifts.
First, baby boomers are entering retirement, and we're seeing approximately 10,000 boomers per day reach age 65 (the first year of Medicare eligibility). As more people become eligible for Medicare, its responsibility to cover some of seniors' medical costs rises.
Secondly, people are living longer than ever. On one hand, we should celebrate that fact that Americans are living longer, fuller lives. However, it's a nightmare scenario for the already pressured Medicare program. Elderly patients tend to account for the bulk of healthcare expenditures in this country, and if patients are living longer, it could mean that Medicare will need to spend much more per patient.
Finally, medical cost inflation is handily outpacing the national inflation rate in the U.S., which is gauged by the Consumer Price Index. The cost of everything from surgical procedures to prescription drugs is soaring at rates much higher than that of wage and CPI growth, meaning Medicare (and seniors) are having to pick up the slack.
Here's how much the average senior will receive in lifetime Medicare benefits
But how much can the average senior expect to receive in lifetime Medicare benefits? Let's take a look, courtesy of a 2012 report from the Urban Institute and authors C. Eugene Steuerle and Caleb Quakenbush.
The report looked at the relationship between the lifetime benefits paid into Social Security and Medicare for a fictitious average-wage worker earning $44,600, based on 2012 dollars. Here's what the average senior who turned 65 in 2010 can expect to receive in lifetime Medicare benefits, according to the co-authors' estimations:
- Single male earning an average wage: $180,000 in lifetime benefits.
- Single female earning an average wage: $207,000 in lifetime benefits.
- Two-earner couple earning an average wage: $387,000 in lifetime benefits.
You may have noticed the difference in lifetime benefits between men and women. That difference arises because women live an average of five years longer than men, and thus have higher medical costs.
Two Medicare trends you may be overlooking
Aside from the enormity of these figures, two particular things stand out in the report.
First, the current gap (as of 2010) between the estimated lifetime benefits received from Social Security and Medicare is expected to shrink dramatically by 2030. For example, the average-wage single male and single female who turned 65 in 2010 received $277,000 and $302,000 in lifetime Social Security benefits, respectively. That same cohort was expected to receive an average of $180,000 and $207,000 in respective lifetime Medicare benefits. So, for those who turned 65 in 2010, average Social Security benefits outweigh average Medicare benefits by $97,000 for men and by $95,000 for women.
However, by 2030, per the Urban Institute's calculations, this gap is expected to shrink to $28,000 for men and just $9,000 for women. In other words, Medicare's importance is growing by leaps and bounds, and it may one day provide greater benefits than Social Security.
Secondly -- and this is a figure that often gets overlooked -- what the average senior receives in lifetime Medicare benefits is often far more than what they've paid into the program. Using the figures from 2010 once again ($180,000 in lifetime benefits for men and $207,000 for women), the average-wage worker pays just $61,000 in lifetime contributions into Medicare. This means average men and women are receiving $119,000 and $146,000 more, respectively, in lifetime benefits than they paid into the program. The Urban Institute estimates that by 2030, male retirees will receive $221,000 more in lifetime benefits than they paid into Medicare, while female retirees will take home $263,000 on top of what they contributed. This fundamental flaw behind Medicare makes fixing the program for the long term a daunting task.
Yet there's another concern with this data as well. If seniors' benefits are increasing, it also means their potential liability might be as well. Keep in mind that about 80% of medical expenses are covered by Medicare, possibly putting seniors on the hook for 20% of a growing number by 2030.
Things to consider
With medical expenses rising, and your portion of the expense liability increasing as well, it's important that you take two things into consideration.
First, understand that original Medicare isn't your only option. For around 70% of today's seniors, original Medicare has been working wonderfully. Part A, Part B, and Part D coverage provide inpatient and outpatient care, as well as prescription drug coverage. Additionally, Part F gives seniors the option of adding supplemental coverage to help fill in the gaps where they might owe more. As a reminder, there are no out-of-pocket annual limits when it comes to Medicare expenditures, so this is where a Part F plan might come in handy. But Medicare is also lacking in some other areas, including simplicity and a lack of basic hearing, dental, and vision care.
Seniors should give consideration to Medicare Advantage plans (known as Plan C) to see if they would be better options for their situation. Medicare Advantage isn't always the best option, but between 2005 and 2015 the number of eligible seniors enrolling in the privately sponsored plans has more than doubled from 13% to 30%. Obviously, there's some merit to the simplicity offered by Medicare Advantage plans, which often have all of Medicare's perks as well as a prescription drug, vision, hearing, and dental plan, all rolled neatly into one package. More importantly, Medicare Advantage plans have annual out-of-pocket limits for outpatient expenses (not including Part D), which can add some degree of certainty to your later-in-life medical expenses.
The other important consideration -- and this is for you, pre-retirees and current workers -- is that you seriously need to consider saving above and beyond your current retirement goal to factor in the rising cost of medical expenses. Relying solely on Medicare simply isn't a wise move, especially with the Hospital Insurance Trust Fund facing the possible exhaustion of its cash reserves by 2030, according to the Social Security and Medicare Board of Trustees' 2015 report. If lawmakers do nothing, then by 2030 hospitals and physicians will be reimbursed far less than what they are now (i.e., based on revenue received from payroll taxes), and they may choose to drop the nationally recognized program.
The importance of Medicare cannot be overstated, but working Americans also need to be prepare to deal with potentially higher costs themselves once they meet the age of eligibility.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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