Will Health Care Costs Bankrupt Aging Boomers?

Abstract

Rising health care costs threaten boomers' retirement security. In 2040, half of adults age 65 and older will spend at least 19 percent of their incomes on health care, up from 10 percent in 2010, if costs grow at the intermediate rate projected by the Medicare trustees. About 7 in 10 older Americans in the bottom two-fifths of the income distribution will spend more than 20 percent of their incomes on health care in 2040. These projections underscore the importance of controlling health care costs and the need for boomers to plan for future health care spending.

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Executive Summary

Rising health care costs pose a significant threat to boomers' retirement security. Although Medicare covers nearly all adults age 65 and older, premiums, deductibles, copays, and holes in the benefit package leave many older Americans with substantial out-of-pocket expenses. Unless health care practices or public policy change, seniors' out-of-pocket spending will likely grow in coming years as health care costs continue to increase.

This report examines the likely financial burden of health care costs for baby boomers as they age. It uses DYNASIM3, the Urban Institute's dynamic microsimulation model, to project income and out-of-pocket medical expenses and insurance premiums for Americans age 65 and older from 2010 to 2040. The boomers, born between 1946 and 1964, will reach age 66 to 84 in 2030 and age 76 to 94 in 2040. Our baseline estimates assume that current Medicare policies and employer benefit practices continue, and use the intermediate per capita Medicare cost growth rates forecast by the Medicare trustees in 2009 to inflate future out-of-pocket spending levels. Other scenarios simulate out-of-pocket spending under alternate cost growth assumptions. The estimates exclude the cost of long-term care, which does not usually involve medical treatment.

The results show that the financial burden of health care costs will increase steadily over time if future costs grow at the intermediate rate projected by the Medicare trustees in 2009.

• Between 2010 and 2040, median annual real out-of-pocket costs for Americans age 65 and older will more than double in constant 2008 dollars, from about $2,600 to about $6,200. Nearly 1 in 10 older adults will spend more than $14,000 per year on health care in 2040.
• Real median size-adjusted household income for adults age 65 and older will increase more slowly, from about $26,800 in 2010 to about $34,600 in 2040 (in constant 2008 dollars). Later-life income increases each decade because productivity gains raise earnings at working ages, boosting future Social Security benefits, although income growth will slow down after 2020.
• Because costs will grow more rapidly than incomes, the financial burden of health care will increase for older adults. Between 2010 and 2040, the median share of household income spent on health care by Americans age 65 and older will increase from 10 to 19 percent. The share of adults age 65 and older spending more than a fifth of their household income on health care—a common measure of burdensome costs—will increase from 18 percent in 2010 to 35 percent in 2030 and 45 percent in 2040. The share with burdensome costs will increase to 52 percent if employers eliminate all retiree health benefits by 2040.
• Rising out-of pocket health care spending will consume about 60 percent of the growth in older Americans' real household incomes between 2010 and 2040.
• The growth in health care costs will create special challenges for low-income seniors. Between 2010 and 2040, the median share of income spent on health care by older adults in the bottom fifth of the income distribution will increase from 21 to 39 percent. The share for those in the top fifth of the distribution, by contrast, will increase by only 3 percentage points (from 5 to 8 percent). In 2040, health care costs will consume more than 20 percent of income for about 7 in 10 of those in the bottom two-fifths of the income distribution.

The Medicare trustees' intermediate long-term projections assume that costs will grow more slowly than they have in the recent past. Financial burdens for older Americans will increase more rapidly if costs instead grow at the average annual rate that prevailed between 1970 and 2005.

• Under this scenario, the median share of income spent on health care by adults age 65 and older will reach 29 percent in 2040, and 64 percent of older Americans will devote at least one-fifth of their incomes to out-of-pocket costs.

These projections underscore the need to control rising health care spending. As many analysts have observed, steady cost growth threatens to bankrupt Medicare and strain the federal budget, potentially crowding out other government priorities. The deleterious effects of increased health care spending on older adults' personal budgets have received less attention but are also substantial. Numerous ways of curbing cost growth by improving the efficiency of health care delivery have been suggested, often focusing on reworking financial incentives to reward effective and efficient care. These reforms will not be easy to implement, but they are essential to Americans' retirement security.

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