Commentary: The Real Retirement Time Bomb

Without reform, Medicare premiums will eat away at Social Security benefits

While Washington politicians squabble over the fate of Social Security private accounts, they seem to have contracted a capitalwide case of amnesia about a much bigger problem: Medicare. Yet an analysis done for BusinessWeek by Urban Institute researchers Richard W. Johnson and Melissa Favreault found that by 2040, if health-care costs continue to climb, typical retirees could be paying nearly 22% of their Social Security benefits for Medicare premiums. And that's if they get the full checks promised by current law.

Of course, today's thirtysomethings may never collect on all of those promises. President George W. Bush's drive to reform Social Security is based on projections that the system will fall trillions of dollars short of its obligations (BW -- Jan. 24). The possibility of diminished benefits, coupled with spiraling medical costs, means that future retirees could find themselves with less money for food, housing, and other basic living expenses.

Under current law, a typical retiree in 2040 can expect $1,335 a month from Social Security in today's dollars. But they will pay $292 for Medicare, leaving $1,043. The President has not yet said how he would trim Social Security benefits. But in 2001, a Bush-appointed commission proposed a change in the way initial benefits are figured. Under that plan, the same senior would receive $1,077 a month from Social Security and still have to pay $292 for Medicare -- 27% of their monthly check. That would leave a retiree who has no other income with just $785 a month for food, transportation, housing, and taxes. And seniors would still face rising out-of-pocket medical costs, such as co-payments, deductibles, and additional premiums for supplemental Medigap insurance.

Today, low-income workers get nearly 90% of their retirement benefits from Social Security, though in the future, many seniors will have other income. If the Bush commission plan were enacted, they would have private accounts -- although, unlike basic benefits, the accounts would rise and fall with the markets. Many retirees will also have modest pensions or retirement plans such as a 401(k). But unless a typical retiree's total savings increase sharply, pensions and 401(k)s are not likely to produce more than $1,000 a month in today's dollars, before taxes.

Where will all the money go? Today, seniors pay a premium for Medicare Part B, which covers doctor visits, lab tests, and outpatient hospital care. In 2005, that payment is $78.20 a month, taken directly out of Social Security checks. Starting in 2006, most seniors will also be paying an estimated $35 a month for Part D, the new drug benefit.

The trouble is, with medical costs skyrocketing, premiums are expected to rise sharply in coming years. The Urban Institute study assumed modest future increases -- just 3.2% annually. In fact, Medicare premiums have been rising much faster than that in recent years -- 17.5% in 2005 alone.

Make no mistake, future retirees will be getting plenty of care for all those premiums. For instance, a couple now 40 years old and likely to start collecting Medicare in 2030 can expect to receive a staggering $665,000 in lifetime health benefits after they retire, according to Urban Institute senior fellow C. Eugene Steuerle.

That's why the government's projected Medicare shortfall is triple that of Social Security. Exploding long-term care costs for seniors is also why Medicaid -- already crushing state budgets -- is expected to rise sharply in coming years.

But government won't pick up the whole tab for seniors' care. Unless something changes, future retirees will have to accept major reductions in their standard of living in exchange for health insurance.

That's a trade-off that society may choose to make. But it should decide with its eyes open. So far, when it comes to the critical link between Medicare and Social Security, both parties in Congress and President Bush have been moving forward with their eyes wide shut.

By Howard Gleckman

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