Record COLA increases provide opportunity for client engagement

The announcement of the Social Security Administration’s cost-of-living adjustment of 8.7% for 2023, combined with only the third-ever decline in Medicare Part B premiums, was good news for retirees.

But, in terms of health care, it’s important to put 2023 into context. Here are key takeaways:

These changes are outliers, not a new normal

The COLA increase was the highest in 40 years, because inflation is at a 40-year high. And the slight reduction to Medicare Part B premiums from last year’s 14.5% increase is only the third time that has occurred in the history of the program. The drop is primarily the result of lower expected costs for the Alzheimer’s disease drug, Aduhelm. Although COLAs will remain elevated as long as inflation remains high, clients should definitely not plan on Medicare premiums continuing to decline.

As with all things retirement, plans must be based on long-term expectations

The key numbers to focus on are the spring 2022 Social Security and Medicare projections for the next 8-10 years. These projections provide a long-term annual forecast for COLAs to increase at 2.4% and Medicare premiums to rise at an average of 5.9%. Although these may be adjusted upward if current inflation rates continue into 2023, clients should plan on the trajectory of Medicare premiums to rise at twice the rate of annual COLAs – consistent with the last 40 years of data.

Medicare Part B premiums reflect a small portion of overall health care costs in retirement

In addition to Part B premiums, planning for retirement health care should include Part D premiums, supplemental insurance and all out-of-pocket costs including dental, vision, and hearing. Our data, which draw on government projections and 530 million actual health care cases to actuarially determine average future expenses, show that the $62.40 annual savings from the Part B premium will equal about 1% of the total annual health care expenses for an individual retiring at age 65 in 2023.

Other than Part B, health care costs will increase in 2023

Each of the cost components of retirement health care (besides Part B premiums) will increase in 2023. Projections from earlier this year for supplemental insurance (Medigap) show it is expected to increase 8.6% per year for the coming decade, assuming an average historical long-term inflation rate plus the annual policy age ratings.

HealthView Services’ Retirement Healthcare Cost Index highlights the increasing impact of health care costs on retirement budgets    

Using updated 2023 numbers and current long-term projections for future increases, the index reveals that for an average 65-year-old couple retiring next year, total health care costs will account for around 45% of their projected Social Security benefits. In our new Insights Brief, we show that assuming they live to 89 years old, they will need close to 100% of their benefits to cover health care expenses during their final years of life. The Retirement Healthcare Cost Index does not include long-term care expenses, another critical retirement planning consideration.

The individual circumstances of each client matters

Income, state of residence, gender and health condition are all variables to factor into the retirement health care planning process. For example, a 50-year-old couple planning to retire at age 65 would spend $90,000 more on supplemental insurance in Massachusetts versus Hawaii. Additionally, higher Social Security COLAs may also result in higher taxes on benefits. Taking advantage of a Roth IRA and/or a health savings account to pay health care premiums in retirement is an opportunity to benefit from their in-retirement tax advantages.

Decumulation plans need to account for rising health care costs

Since health care costs are expected to increase faster than COLAs through retirement, it’s important to build a decumulation plan that ensures that funds will be available to address annual healthcare costs, which will take up a greater portion of retirement budgets over time.

Although the Social Security and Medicare changes for 2023 are the exception rather than the rule, they are a welcome opportunity for financial professionals to engage with clients around the long-term trajectory of these expenses and add value by developing savings plans that ensure this critical need is met.

 

Ron Mastrogiovanni is CEO of HealthView Services. He may be contacted at [email protected].

 

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