Retiree Social Security Benefits to Be Wiped Out by Health Care Costs: Index

The index draws on HealthView Services' cost data from more than 50 million annual health care cases. According to the firm, it is calculated using an actuary- and physician-reviewed methodology that determines individual longevity and retirement health care costs based on age, gender, health and time to retirement. The index assumes that the primary income earner will generate the Social Security average of $1,294 per month in today's dollars and the spouse $817 per month. While health care costs tend to increase as retirees age, the index measures the lifetime average of health care costs.

Escalating Costs

Better-off couples who receive less than $170,000 in retirement income will use a smaller portion of their benefits for retirement health care costs than those receiving average Social Security benefits. Even so, health care costs will still take up a sizeable portion of those benefits.

For a healthy couple retiring in one year with one spouse earning maximum Social Security benefits, but earning less than $170,000 in total income, 39% of benefits will be required to pay for care. This amount will rise to 52% if they retire in 10 years.

The burden becomes heavier if the same couple earns more than $170,000 in retirement, as they will be subject to the Medicare surcharge, which depending on their modified adjusted gross income raises Medicare Parts B and D premiums by between 35% and 200%.

An affluent couple retiring in one year who fall into Medicare's top income bracket will be responsible for an additional $255,267 in lifetime Medicare surcharges.

The index shows how the gap between health care cost inflation of 5% to 7%, based on current HealthView data, and the 2% expected cost-of-living increases in Social Security will drive the increasing portion of Social Security required for future retirees' healthcare costs.

It also underscores the range of factors that people need to take into account when planning for retirement. These include age, gender, marital status, health, where they live, number of years to retirement and when they elect to receive their Social Security benefits.

"For middle-class Americans who tend to rely more on Social Security benefits, the differential between the healthcare cost inflation rate and Social Security cost-of-living adjustments is a time bomb," Mastrogiovanni said.

"The index highlights the need for a comprehensive and individualized approach to retirement planning that factors in expected health care costs."

Mastrogiovanni said the index highlights the need for advisor tools that show how decumulation strategies — working longer, saving more, moving to a less expensive state and Social Security optimization — will influence retirement plans.