Healthcare Costs Debt & Inflation Could Be Issues for Retirees

April 19, 2016

In the previous two articles on the Baby Boomer retirement crisis, the lack of retirement savings and looming pension/Social Security income problems were at the top of retiree concerns.  If these weren’t enough, there are other significant issues they could face as well.

Healthcare costs and the Federal Medicare program would be next on this growing list of worries.  If Social Security is not good, Medicare (the Federal program of healthcare for seniors over age 65) could be considered sickly.  In 2013, Medicare accounted for 3.6% of the Federal budget, but by 2035, it could be up to 5.6%.  Medicare cost “inflation” may not be the primary cause of the increase; lower Medicare tax receipts from workers during the last economic downturn (lower wages = lower Medicare taxes collected), the continuing longevity of Medicare recipients, and the increase of retiring Baby Boomers starting Medicare benefits have all contributed to the rise, offsetting reductions from the Affordable Care Act.   In addition, the recent lack of Social Security cost-of-living adjustments (COLA) has forced the Medicare administrators to increase Medicare premiums to higher-income recipients over the past year.  If the system continues to be underfunded, further premium increases could come for all recipients.  These, plus continued potential reductions in Social Security COLA’s, could crimp retiree budgets.

The prospect of long-term (custodial) care for today’s seniors is another problem area.  Like normal healthcare, long-term custodial care costs are rising around 4% annually nationwide.  The average annual cost for a patient in a RI custodial center is estimated at $93,000/year.   These rising costs have causing significant financial problems for the Medicaid (welfare) system over the years where eligibility rules have become stricter in response to so-called “Medicaid planning” strategies.  Many insurance companies are discontinuing their long-term care insurance underwriting or are continually applying to State insurance divisions for premium rate increases on current policies, citing continuous underwriting losses.  As a result, long-term care insurance is becoming unaffordable for many seniors and many question the value of such a policy.  One alert Daily News reader emailed me to ask if self-funding long-term care from retirement accounts was a better alternative.  It depends, but there are considerations of taxes on withdrawals, the uncertainty of how much money may be needed, and whether retirement income prior to long-term care needs may use the money first.  Self-insurers also miss the benefit of the risk-transfer of costs from the person to the insurance company.

Consumer debt and cost-of-living inflation are two other risks to a financially-stable retirement.   While inflation and interest rates are low now (though this adversely affects seniors’ bank CD and savings account interest), future higher interest on credit cards and increased costs of goods and services could hurt the ability of Baby Boomers to make ends meet in retirement.  Too much debt is not helpful to any budget, but to a senior on a fixed or slow-growth income with limited resources, higher credit card debt, a still-unpaid mortgage or even being a co-signer on a grandchild’s student loan could further hurt their chances for a financially sustainable retirement.  In next week’s article in the series, we’ll look at some potential solutions to these problems.