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Abstract

Older men who expect high health care costs for themselves or their spouses after age 65 retire about 13 months later than those who expect low costs. The difference for women is 12 months. For those receiving health insurance from their employers, continued work reduces the risk of high out-of-pocket health care costs. Working longer also increases retirement incomes, making health care costs more affordable.

Introduction

Rising health care costs threaten many older Americans’ financial security. Medical expenses now consume a substantial share of household spending in retirement, and that share is likely to rise as costs continue escalating. Cutbacks in employer-sponsored retiree health benefits add to many older Americans’ difficulty paying for health care.

Many older workers are responding to these financial pressures by delaying retirement. For those receiving health insurance from their employers, continued work reduces the risk of high out-of-pocket health care costs. Working longer also increases retirement incomes— making health care costs more affordable—by raising earnings, boosting Social Security and employer sponsored pension wealth, improving the ability to save, and reducing the years over which retirement wealth must be spread. Not all older adults, however, are able to continue working.

Health Care Costs at Older Ages

Although nearly all Americans age 65 and older ar covered by Medicare, many face substantial out-of pocket health care costs. The annual Medicare deductible for hospital stays in 2008 is $1,024. Medicare Part B, which covers outpatient services, requires a substantial premium, now about $1,157 for most enrollees (and more for singles with incomes above $82,000 and couples with incomes above $164,000). Part B carries an annual deductible of $135, plus a 20 percent coinsurance rate.

The standard Medicare Part D benefit for outpatient prescription drugs also requires hefty premiums (currently averaging about $324 per year), a $275 annual deductible, and 25 percent coinsurance. Once total drug costs exceed $2,510, however, beneficiaries must pay 100 percent until total out-of-pocket spending reaches $4,050 (after which enrollees pay only 5 percent of drug costs). Additionally, older adults must pay for services not covered by Medicare, such as dental care, routine vision care, hearing exams, and most long-term care services. These costs add up. Median out-of-pocket health care spending consumed 14 percent of income for adults age 65 to 74 in 2003 and 22 percent for those age 85 and older (Neuman et al. 2007).

To keep costs down, many older Americans obtain private supplemental coverage, either individual policies from insurance companies or group coverage from former employers. Individual plans are expensive, though, and many employers are cutting back on subsidized retiree health benefits. Low-income seniors may qualify for public assistance to pay their Medicare premiums, deductibles, and copayments. However, enrollment entails a complex application process at stat welfare offices and a strict asset test. Relatively few eligible seniors apply for these benefits.

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The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

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