Retirees have received two pieces of good news in recent weeks as 2023 approaches: Medicare Part B premiums are being lowered by $5.20 per month[i] (and Part B deductibles will also decrease by $7.00), marking only the third time that Medicare Part B premiums will be less than they were the previous year; Security Cost-of-Living Adjustments (COLAs) will increase by 8.7%[ii] in 2023 – the fourth-highest jump in history and the largest since 1981-82.
While these are certainly positive developments, it is important to consider these forthcoming changes in the proper context:
- Social Security COLAs reflect the current high inflation rate – the inflation-adjusted value of benefits received each month remains the same for retirees.
- Lower Medicare premiums for 2023 (which are a direct result of decreased costs related to Alzheimer’s drug, Aduhelm) follow a hefty 14.5% increase in 2022.
- Medicare’s long-term projections indicate that premiums will increase by approximately 5.9% annually (on average), while Social Security COLA projections are expected to grow by 2.4%. Although both will likely be adjusted based on future inflation, the long-term trend of Medicare premiums rising faster than COLAs will almost certainly continue.
- Medicare Part B is one component of future healthcare costs. Premiums for Medicare Part D prescription drug coverage, supplemental insurance (Medigap), dental insurance, and out-of-pocket spending on deductibles and co-pays are all expected to increase moving forward. The $62.40 annual Part B reduction in 2023 amounts to less than 1% of total projected medical spending for a healthy 65-year-old individual.
The 2023 adjustments are outliers both from a historical context [i] [ii]and from what the Centers for Medicare and Medicaid Services (CMS) and the Social Security Administration (SSA) project moving forward. Since retirees may need to manage their income stream for 20 years or more, they need to account for these long-term expenses and plan their budgets accordingly.
HealthView Services’ Retirement Healthcare Cost Index puts the long-term impact of next year’s changes into perspective. The Index compares the projected cost of retirement healthcare against estimated Social Security benefits throughout retirement. While the actual numbers may change in the future, the trajectory between Social Security and healthcare costs will likely remain the same. Over time, the portion of Social Security benefits required to cover medical expenses will grow as average healthcare costs (around 6% annually) outpace Social Security COLAs (2.4% annually).
Table A shows that in the first three years of retirement, this healthy 65-year-old couple can expect to see healthcare absorb 45% to 48% of their Social Security income (before taxes). After ten years, this number will rise to 64%, and by the end of their lives, healthcare will likely offset their entire Social Security checks. These projections incorporate updated Medicare Part B premiums and Social Security COLAs for 2023 – plus the latest available data in 2024 and beyond from Medicare[iii] and Social Security[iv].
| Year | Age | Social Security Benefit | Healthcare Cost | Retirement HC Cost Index |
| 2023 | 65 | $31,701 | $14,122 | 44.5% |
| 2024 | 66 | $32,494 | $14,999 | 46.2% |
| 2025 | 67 | $33,274 | $15,916 | 47.8% |
| 2026 | 68 | $34,072 | $17,032 | 50.0% |
| 2027 | 69 | $34,890 | $18,212 | 52.2% |
| 2028 | 70 | $35,727 | $19,373 | 54.2% |
| 2029 | 71 | $36,585 | $20,605 | 56.3% |
| 2030 | 72 | $37,463 | $21,864 | 58.4% |
| 2031 | 73 | $38,362 | $23,246 | 60.6% |
| 2032 | 74 | $39,283 | $24,245 | 61.7% |
| 2033 | 75 | $40,225 | $25,641 | 63.7% |
| 2034 | 76 | $41,191 | $27,124 | 65.8% |
| 2035 | 77 | $42,179 | $28,696 | 68.0% |
| 2036 | 78 | $43,192 | $30,324 | 70.2% |
| 2037 | 79 | $44,228 | $32,051 | 72.5% |
| 2038 | 80 | $45,290 | $33,879 | 74.8% |
| 2039 | 81 | $46,377 | $35,787 | 77.2% |
| 2040 | 82 | $47,490 | $37,811 | 79.6% |
| 2041 | 83 | $48,630 | $40,063 | 82.4% |
| 2042 | 84 | $49,797 | $42,432 | 85.2% |
| 2043 | 85 | $50,992 | $44,928 | 88.1% |
| 2044 | 86 | $52,216 | $47,566 | 91.1% |
| 2045 | 87 | $53,469 | $50,339 | 94.1% |
| 2046 | 88 | $54,752 | $52,952 | 96.7% |
| 2047 | 89 | $56,066 | $55,555 | 99.1% |
| Total | $1,069,944 | $774,762 | 69.6% | |
Case Assumptions: healthcare costs are based on national averages and include Medicare Part B and D premiums, Medigap Plan G, and dental insurance, plus out-of-pocket spending on hospitalization, doctors, tests, prescriptions, dental, vision, and hearing. Medicare Part A is assumed to be no-cost in retirement, and IRMAA surcharges are not included in projections. Social Security benefits are based on the average household amount for 2023 per Social Security Administration projections: each spouse files for Social Security benefits at age 65 years and 0 months and receives an adjusted benefit for filing before Full Retirement Age (FRA).
As advisors and retirees are fully aware, a holistic retirement plan is critical to ensuring financial needs are met over a lifetime. The welcome news of the COLA increase and Medicare premium decrease for 2023 provides an opportunity for advisors to sit down with clients to review their plans. In particular, it provides a chance to examine the relationship between Social Security income and retirement healthcare costs, which driven by healthcare inflation, annual age-related adjustments, and more frequent health-related needs as clients age, will continue to increase over time. (Current Medicare and Social Security COLA projections may be revised if inflation remains high for an extended period of time.)
About the Retirement Healthcare Cost Index
Since 2014, HealthView Services has utilized the Retirement Healthcare Cost Index as a simple calculation that divides the projected cost of retirement healthcare by estimated Social Security benefits in a particular year, period, or entire retirement Calculations draw upon CMS and SSA estimates, actual cost data from 530 million healthcare claims, and other measures of inflation unique to healthcare to project how an individual’s retirement medical expenses impact Social Security benefits over time.
About HealthView Services
HealthView Services provides retirement healthcare, Social Security, and long-term care planning tools and data to many leading institutions and advisors in the financial services industry. HealthView’s White Papers provide context and perspective on key retirement-planning issues.
[i] https://www.cms.gov/newsroom/fact-sheets/2023-medicare-parts-b-premiums-and-deductibles-2023-medicare-part-d-income-related-monthly
[ii] https://www.ssa.gov/news/press/factsheets/colafacts2023.pdf
[iii] https://www.kff.org/medicare/slide/monthly-part-b-premiums-and-annual-percentage-increases/
[iv] https://www.ssa.gov/oact/cola/colaseries.html
[v] https://www.cms.gov/files/document/2022-medicare-trustees-report.pdf
[vi] https://www.ssa.gov/oact/TR/TRassum.html#:~:text=The%20AWI%20is%20used%20to,January%20of%20the%20following%20year.