The Social Security Inflation Lag Calendar – Partial Indexing – Part 1

Out Of Money By December 12th – Social Security Partial Inflation Indexing – Part 2 

Out Of Money By November 29th – Social Security Indexing – Part 3

The Critical Impact Of Medicare Premiums On Social Security Inflation Indexing – Part 4

A critical component of financial planning for retirement is that many healthcare expenses are a shared expense for those 65 and older, as a matter of current law and design. A 65-year-old pays the same Medicare Part B premiums as a 95-year-old, and someone in perfect health pays the same premiums as someone with multiple serious health issues.

By law, 25% of total Medicare Part B expenses are funded by Medicare premiums, which are usually withheld from monthly Social Security benefits. So, when the average expenses of Medicare increase on a per person basis – then so do the premiums.

Anyone who is in Medicare is participating in a shared pool, via the amount of their premiums. And if the characteristics of the other people in the pool change in such a way that average expenses rise – then everyone shares in that rise through increases in the size of their premiums, and the resulting decreases in the standard of living that can be supported by Social Security net of Medicare.

A key issue that was examined in detail in the Part 4 analysis (which is linked here) is that in recent years there have been almost no increases in net Social Security benefits for the average retiree, because just the rapid increases in Medicare Part B premiums alone have been enough to almost entirely consume the minor increases in Social Security benefits.

This situation is being presented as a short-term anomaly, due to the unusual combination of lower than normal general inflation and higher than normal medical expense inflation. In this Part 5 analysis, we will take a look at the longer-term future.

There is also the critically important consideration that the “hold harmless” provision of Social Security means that the division of shared and rising medical expenses is not equal within the pool. When we properly include this factor – that by itself can be enough to change many retirement decisions. As we will explore, this also means that many people are volunteering to potentially pay excess Medicare premium increases for other people in the pool for up to five years – without realizing they are doing so.

The goal of this fifth analysis in a series is to give you an early and comprehensive understanding of what is likely to become a defining challenge for an entire nation when it comes to both personal and average standards of living in retirement. An overview of the first four analyses is linked here.

Factor #1: The Average Age Of The Shared Pool

The easy shorthand explanation might be to say that the issue with Medicare premiums is that actual medical expenses have been increasing at a faster rate than what the government reports as the general rate of inflation – which is true.

However, the coming increases in Medicare premiums are not fundamentally just an inflation index mismatch issue – but rather that is only one of eight major problems. Entirely aside from whatever the future rate of inflation may be – there are other fundamental factors in play created by the aging of the Boomers that are expected to change the “pool”, and to substantially increase the average expenses of that pool in the coming years and decades.

The first consideration is that average health – and average medical expenses – are different at age 75 than they are at age 65, and are different at age 85 than they are at age 75. Aside from end of life expenses, the number of medical issues on average increases with age.

Medicare currently has a disproportionate number of still quite healthy Boomers in their mid-60s to early 70s paying their premiums into the pool, compared to a smaller generation in their mid-70s and older who are in their most expensive years.

Indeed, the early impact of the Boomers reaching retirement is that the per person expenses of the shared pool are less than they otherwise would be, and Medicare premiums are also, therefore, lower than they otherwise would be,

However, as ever more Boomers age in retirement, that ratio is expected to shift, and the average age of those in the shared pool is expected to rise. That changes the characteristics of the pool as those who are in their higher expense years become a greater percentage of those participating, and that then increases the premiums. (And yes, not everyone over 65 is retired, but it really simplifies the language to treat it that way herein.)

Everyone 65 and over will share the increase in premiums, and everyone will also share the resulting decrease in the standard of living that can be supported by Social Security net of Medicare.

Factor #2: An Eventual Decrease In Younger Retirees

For the near term, the sheer volume of newly retired and healthy Boomers in their 60s is expected to help contain the costs of the growing numbers of Boomers in their 70s and then 80s. But by around 2030 – that changes. Now the maximum number of Boomers are aging together and getting more expensive together – and there is the smaller generation behind them now reaching age 65 and entering the pool.

Sixty-five years after the medical revolution of the widespread usage of reliable female birth control in the form of the Pill (which ended the Baby Boom), another medical revolution of a sort will arrive. There will be the maximum number of Boomers alive and aging together in retirement, getting more expensive each year, even as the numbers of young retirees entering the pool to share the premiums are decreasing.

The resulting potentially rapid annual increases in premiums will be shared amongst the entire pool of those participating in Medicare.

Factor #3: Increasing End Of Life Expenses

Another issue that of end of life expenses.  A disproportionate share of lifetime medical expenses are on average incurred in the last year or two of life.

Not to be morbid – but as anyone who is of an age and is seriously thinking about long-term retirement financial planning is well aware, sickness and death are core considerations. An issue that perhaps some are not taking into account is that Medicare is a shared experience. So it isn't just your personal health or personal mortality that need to be taken into consideration. For even if you are individually fine, the health and death rate of the overall pool will be directly impacting your monthly financial situation through your premiums.

We have a likely major boost in end of life expenses to be shared by the pool as truly large numbers of Boomers begin to enter their last year or two of life together.

There is obviously a huge variation in how long people live as well as what expenses associated with dying will be going into the shared pool. But if we look at 84 or 85 as being about an average lifespan for someone who has reached 65 – that means the first age year of the Boomers, those born in 1946, will be reaching their average expected lifespan by 2030 or 2031. And then the numbers will be rapidly building each year thereafter as an ever larger percentage of the Boomers are in their 80s – and they represent an ever larger percentage of the shared pool.

Now the interesting thing about the year 2030 is that the final year of Boomers who were born in 1964, will have already all reached 65 in the year 2029. So 2030 becomes the first year where there are significantly fewer young and healthy retirees entering the pool and sharing the premiums.

This relationship has not always been there – average life spans were shorter when the Boomers were born. But the extensions in average life spans since then have created an almost perfect correlation.