One of the great benefits of turning 65 is access to Medicare. Although you may retire before becoming eligible, the impact must be understood before you apply for benefits. This insurance, which you and your employer both paid 1.45% on every dollar of wages you earned over your lifetime, will provide some help to offset the cost of health care. Of course, the real question you’re probably asking is, How much coverage will Medicare provide, and what will it cost? Well, unless you’ve been living under a rock, you’re probably aware that Medicare in its current form is in financial distress. Per the 2014 annual report from the Social Security and Medicare Board of Trustees, the projected drawdown of the Medicare Hospital Insurance (HI) trust fund assets will accelerate until the trust fund is exhausted in 2030. So what does that mean? After 2030, incoming Medicare tax revenues will only be sufficient enough to pay 85% of HI costs, declining to 75% in 2047, and then stay about flat. Pretty grim, isn’t it?
The good news is that Medicare will still have enough money to pay some level of benefits for the foreseeable future, assuming the projections done by the Social Security and Medicare Board of Trustees for health care cost is accurate. Even if they’re wrong, and they probably are, Medicare will still be available to seniors in some capacity. Of course, like Social Security, no one knows what Medicare will look like when you need it. Although some of the options being discussed by Congress (see below) may or may not materialize, something will need to be done to ensure coverage for all individuals who expect this benefit to be available in the future. Let’s review some of the changes that could be on the horizon for Medicare.
- Raise the age qualification. With seniors living longer, the age to qualify for Medicare benefits may increase from 65 to 67. A change like this makes sense on the surface, especially if people are working and living longer. If this came to fruition, I’d expect it to be phased in over many years. Potential impact if this happens: expensive, as retirees will need to continue other health insurance coverage for a couple more years.
- Increase the rate. As discussed above, Medicare is funded by you and your employer at the rate of 1.45% for all wage income. Increasing the rate would provide immediate relief to Medicare’s depleted funds, but the impact of additional cost to the employer and employee could hurt jobs and ultimately the economy which makes this unlikely. Although everyone would feel a tax hike like this, the middle-class folks who have already seen their wages squeezed over the past decade would especially feel it. Potential impact if this happens: immediate for everyone with a job.
- Means testing. If Medicare can’t get enough money to fill the coffers, they may decide to start charging wealthier seniors even more for benefits. Although this is already happening today for parts B and D, the increase could be a lot more. In fact, they may decide to start charging for part A as well, which is currently free to all Medicare recipients regardless of income as long as they’ve paid in to Social Security for 10 years. And as always, the definition of wealthy varies based on whom you talk to, so the potential pricing tiers are anybody’s guess. Potential impact if this happens: immediate for wealthier seniors once they start receiving benefits.
- Modify coverage. When it comes to health care, we all feel like we’re paying more for less. We’ve seen how out-of-pocket cost continues to climb and coverage diminishes. Expect this to continue into the foreseeable future as this approach is consistent with the trend we’ve all seen from the health care industry trying to keep a lid on overall cost. But what if Medicare goes the way of the employer-based health care system in which more and more companies are pushing employees toward high-deductible plans in order to defray their cost of health care? This isn’t completely out of the realm of possibility as there once was a time when seniors paid premiums of $3 a month for part B. Potential impact if this happens: immediate for seniors who are pushed toward coverage they don’t want or can’t afford due to higher out-of-pocket expense before benefits kick in.
- Voucher payment. This is an option that’s being considered to keep down cost in the future. The approach is exactly what it sounds like, a direct payment to the recipient for a flat amount that would be used to purchase whatever insurance you want. Although the details are unknown, the payment amount would probably be enough to get the basic coverage, and anything you wanted over and above that coverage would come out of your own pocket. Potential impact if this happens: immediate for all future seniors on Medicare once the change is phased in.
No one truly knows what changes to expect from Medicare in the future. What we do know is that the cost of Medicare is unsustainable, and modifications must be made to ensure its future viability. The best thing you can do is plan on paying more for less by reflecting a higher health care cost in your retirement budget. As the information in Chapter 4 of my book Climbing the Financial Mountain clearly shows, health care becomes a bigger percentage of your retirement expenses as you get older. What this means is that even with a modified lifestyle in your late 70s to early 80s, expect your lower expenses to be partially absorbed by higher health care cost. So be prepared for health care expenses to be an issue for as long as you live.