Health costs in retirement
The national debate on health reform has me thinking about a particular angle of the question: paying for health care in retirement. Let’s put aside for the moment long-term care costs (i.e., nursing homes) and focus on regular medical care—doctors’ bills, hospital fees, drugs, and so forth.
Health care costs in retirement, like health care costs generally, continue to explode. The numbers are daunting. In a June 2009 report, The Employee Benefit Research Institute in Washington estimated that a 65-year-old couple retiring in 2009 would need $268,000 to $414,000 in savings to pay for out-of-pocket health expenses during retirement. This is in addition to the costs that Medicare would pay on behalf of the couple.
Wow! These are amazing numbers. They are larger than most people’s nest eggs.
But here’s the question I’ve been pondering. Is this actually the right way to think about health care costs—as one huge, unmanageable lump sum? I don’t think so, for two reasons.
First, all health care projections are plagued by a problem of compounding—or, as Herbert Stein, the noted economist, once said, “If something can’t go on forever, it won’t.” All long-term estimates of retiree health expenses assume rapid growth in health care costs for the foreseeable future, well in excess of growth in incomes and the economy. When health costs compound at a high rate, they explode and swamp everything. It’s not just retirees who are impoverished—so are governments and private employers and active workers. Entire countries even.
John Maynard Keynes famously observed: “In the long run we’re all dead.” Today’s variant would be: “In the long run, we’re all bankrupt—from health care.”
The question is, can health care costs compound at high rates forever? The short answer is, no. We will not have an economy devoted exclusively to health care and nothing else. But because we cannot see a world in which health care costs grow at slower rates—we cannot today imagine the mechanism by which costs will eventually slow—we take past history, namely rapidly growing costs, and simply project it forward.
Here’s the second reason. When it comes to health costs in retirement, there seems to be an assumption that health is a unique category of expenditure, somehow separate from or independent of our income in retirement. Actually, it’s another category of expense that our retirement incomes can and should be used for. As we age, we spend more on health care. Retirement isn’t just about spending our money on housing, utilities, transportation, or leisure; it’s also about spending money on medicine and doctors and health. And we derive positive psychological (as well as medical, hopefully) benefit from that spending—just as we derive positive benefits from our home or from the dinner we eat or from taking a trip.
Think of it this way. Consider a 65-year-old couple, earning the median household income of $30,000 for retirees, who live for 25 years. That’s $750,000 in total income. Suppose they spend 20% of their income on housing and transportation, and 20% of their income on health. That’s $150,000 each on these two items.
Why is one a problem (health) and the other not (housing and transportation)?
Ah, you say, the problem isn’t spending $150,000 on health—it’s the fact that the $150,000 is growing too quickly, and will bankrupt retirees. I refer you to reason one above. We come full circle.
In the end, I can’t tell you what mechanism will slow costs. Nor can I tell you whether it’s right to spend 10%, 25%, or 50% of your lifetime retirement income on health.
But it’s for these two reasons that when I read of these large estimates, I pause, think about it, and tend not to panic.
Note: The link to EBRI.org will open a new browser window. Vanguard accepts no responsibility for content on third-party websites.
I think you have a point about maybe health costs won’t continue to rise at the same rate. I certainly hope it won’t. But the fact remains at this point $1 in every $6 is spent on health care and is predicted to increase if nothing is done to $1 in every $3. Are you willing to give the health care industry such a large percentage. We have a choice on how much we want to spend on our housing. The difference I see it is that we don’t have a choice on how much we’ll spend on health care.
While not panicked, we am very alarmed by healthcare costs in this country. With estimates between $7,200 and $8,000 per person, we are already paying 3 to 4 times what other developed countries are paying, and older people pay much more. Many factors will continue to drive up medical costs. The $268,000 estimate assumes that Medicare remains as is, which would be a miracle for a bankrupt program. There is already talk of raising the qualifying age to 70. Many more Babyboomers will reach retirement in the coming years, requiring more healthcare overall. What happens to prices as demand continues to rise?
Like many retired folks, my wife and I paid off our home and car. We are too young to qualify for Medicare, so health insurance alone constituted 35% of our family budget, not including dental and out of pocket costs. We had to downgrade and switch insurance carrier to keep premiums in check, but we have a very large deductible. Our 63 year old neighbor pays $1,200 each month for average coverage, plus out of pocket expenses. We’re lucky. At least we don’t pay as much as they do…yet.
After quadrupling the last 20 years, perhaps healthcare costs will hit a ‘black swan’ and crash like the stock market?
On the other hand, healthcare costs can remain irrational much longer than we can remain solvent.
In the long run, we would be dead and would not pay an arm and a leg for medical bills. But we don’t live in the statistical long run.
I wish I could take solace in your argument. Unfortunately, I can’t help but draw the analogy with the cost of a college education. When I started saving for my kids’ educations, the cost of college was rising at a similarly alarming rate - I think it was twice inflation. I didn’t think that could possibly keep up, but saved as if it would anyway. It’s a good thing I did. I recently found an article I had consulted back then that had projections for the cost of 4 years at a public university 20 years hence - it was very close to what I actually wound up paying.
Of course it’s true that we can’t get to the point that our entire GDP goes to healthcare. But I hate to think of how large a percentage it could become.
This article points the root of the problem. US Americans no longer view health care as a personal cost. It is now viewed as a government responsibility, even though national/state constitutions do not require this.
As a result, there is no price competition. Hospital rooms are built fancier than 5-star hotels, becoming increasingly excessive, and cost ridiculous amounts. The same is true for specialists, many lab tests, and many drugs. In fact, prices are not even readily available, and rarely discussed for “covered” expenses, i.e. paid by someone else.
As the author states, this cannot go on indefinitely. The question is, how do we hurry up the process, so that self-responsible consumers have reasonable prices. The answer is not insurance reform, because insurance costs just reflect underlying costs. The answer is price competition reform. Providers should be required to clearly post prices, provide cost estimates, and get your approval prior to spending, except for true emergencies. (It can very similar to when you get your car fixed.) In fact, there are countries where there is not much insurance. There people buy varying levels of health care based on what they can afford, and prices are lower. There can still be very high quality care available for a higher price, but basic care is also available for a basic price.
Less governement regulations will help to slow down the cost. Allowing health insurance companies cross the state line will increase competition. Healthy discussions will produce interesting solutions, but governement enforcement will always have a negative impact.
Why are we spending so much on Health Care??Multiple reasons….one that stands out vividly is unnecessary duplication.
example …in southeast wisconsin….less than a mile apart a huge network Aurora is building a new hospital….when Columbia St Mary’s also large facility exists. almost next door.
Obscene and foolish and wasteful are a few of the words that apply to this situation.
I am sure there is repetition of this all over the country with no curbs.
There’s a tired manta, “Less government regulations will help slow down the cost.” Then why is it that government-run programs in the rest of the developed world cost one-quarter of what we’re paying? I think the mindless repetition of ideological opinions like this plays right into the hands of those who are making a lot of money off the current situation. Insurance company profits are a small part of the issue, compounded by huge amounts of paperwork necessary to process claims and unnecessary tests associated with fear of lawsuits. But the duplication of services, mentioned above, and the rationing of people instead of procedures seem to me to be fundamentally responsible for our huge costs compared with other countries. Only a single-payer system with cost controls will ultimately reign in the costs, in my opinion.
I tend to look at the gross numbers and remember insurance salesmen who used the same approach to try to sell me a variety of insurance plans. I have no idea what our costs will be down the road because I have no idea what health problems may or may not befall us. I include health care costs as a part of our annual living expense costs and work from there with pension income, Social Security payments and what we have in our portfolios. We watch our annual expenses carefully and budget accordingly.
Less government regulation will slow down costs you say. Remember Ma Bell. Deregulation is what started all this greed. We don!t stand a chance in this society. The banks and insurance companies along with the cable,energy and medical insurance companies will be the downfall of our country.
hmmmm I like this post but I would love to see some on how to save on construction costs in this tough market
…If in fact “the system” is close to bankruptcy now, when the baby boomers start “sucking” on the system in the near future, there will be nothing left! Then what will happen to the individuals who were not prudent in their savings progams, with no medicade or medicare to assist them? Rob from the rich and give to the poor? Could there be a clashbetween these “have” and “have nots?”