Medicare is not facing an immediate crisis, but the program’s costs continue to rise faster than the economy.
According to the latest Medicare Trustees Report, the Medicare Part A Hospital Insurance trust fund is projected to be depleted in 2033. If Congress takes no action, incoming revenue would cover about 89% of scheduled Part A expenses at that time.
Since the report’s release, retirement and health care experts have been assessing what the findings mean for current Medicare beneficiaries, Americans approaching retirement, and higher-income retirees who may face additional Medicare costs.
Their message: Don’t panic. But do plan ahead. The steps you take will depend on your age, income and stage of retirement.
If you’re already on Medicare
Don’t panic about Medicare disappearing
The trustees report does not suggest Medicare is going away. Historically, Congress has intervened before trust fund depletion dates, though not always promptly.
Still, experts say beneficiaries should expect continued debate over taxes, premiums, provider payments, eligibility rules and benefits.
Katy Votava, president of Goodcare and author of Making the Most of Medicare said the report should not be interpreted as a sign that Medicare is going away.
“I don’t think Medicare will disappear,” she said.
Medicare Part A, which covers inpatient hospital care, is funded primarily through payroll taxes that flow into the Hospital Insurance (HI) Trust Fund. The trustees’ warning is a financing issue, not an indication that the program is about to cease operating.
Prepare for higher out-of-pocket health care costs
The more immediate concern for most retirees may be rising health care costs.
The report projects Medicare Part B spending will grow 8.5% annually through 2030, while Part D spending will grow 9.4% annually.
Because Medicare Part B and Part D premiums are tied to program costs, beneficiaries should expect health care expenses to continue rising over time.
Votava said retirees have already been experiencing that trend.
“Out-of-pocket costs will continue to rise, as they have over the past many years,” she said.
As evidence, Votava noted that the Medicare Part B base premium has increased 66.6% over the past decade, compared with a 39.5% increase in the Consumer Price Index during the same period.
“I expect health care hyperinflation to persist as it has for the last 50 years,” she said.
Build a dedicated health care reserve
Retirees should consider earmarking assets specifically for:
- Medicare premiums
- Medigap or Medicare Advantage expenses
- Prescription drug costs
- Dental, vision and hearing care
Organizations such as Fidelity and EBRI have highlighted the need to set aside substantial sums for future medical expenses.
However, research by Sudipto Banerjee, a retirement researcher formerly with EBRI and now with T. Rowe Price suggests that routine health care expenses can often be covered through ongoing retirement income and cash flow.
The larger challenge, according to Banerjee, is preparing for less common but potentially devastating expenses, particularly long-term care and end-of-life costs.
Votava agrees that retirees need realistic assumptions about future health care expenses.
“People need to include health care costs in their retirement projections and assume that expense will grow at two to three times the CPI to keep up with rising costs,” she said.
If you’re between ages 55 and 65, include health care costs in retirement planning now
The report projects Medicare spending will rise from 3.9% of gross domestic product today to 6.5% by 2050.
Whether those costs ultimately show up through premiums, taxes, cost-sharing requirements or other policy changes, retirees are likely to bear at least part of the burden.
For that reason, experts recommend building assumptions into retirement plans that recognize health care costs may rise faster than general inflation.
Votava said pre-retirees should already be incorporating higher Medicare and health care expenses into their retirement projections.
Delay retirement if health insurance is a concern
For some workers, keeping employer-sponsored health coverage until Medicare eligibility may be worth more than retiring a year or two earlier.
Votava said the trustees report strengthens the argument for delaying retirement when affordable health insurance is uncertain.
“Absolutely,” she said.
The concern is particularly acute for people who retire before age 65 and must purchase coverage through the Affordable Care Act marketplace.
“ACA Marketplace coverage has become very costly for many and has limited coverage options,” Votava said.
Don’t overlook long-term care risk
Votava believes one of the biggest weaknesses in retirement planning is the lack of attention paid to long-term care expenses.
“I think long-term care risk transfer strategies don’t get near enough attention in retirement planning,” she said.
Those costs can arrive on top of Medicare-related expenses, creating what she described as a “double whammy” that many retirees are not prepared to absorb.
As a result, pre-retirees should evaluate how they would pay for extended care needs, whether through insurance, dedicated savings, home equity or other planning strategies.
If you’re a high-income retiree
Watch income-related Medicare surcharges
Higher-income beneficiaries already pay larger Medicare Part B and Part D premiums through the Income-Related Monthly Adjustment Amount (IRMAA).
As Medicare costs continue to rise, those surcharges are likely to become a larger part of retirement tax planning.
Votava said retirees should pay close attention.
“Very. I see the impact of IRMAA surcharges continuing to rise,” she said.
Because IRMAA is based on modified adjusted gross income reported two years earlier, retirees can be surprised by higher Medicare premiums after years when they enjoyed large capital gains or undertook Roth conversions, business sales or significant withdrawals from retirement accounts.
Plan ahead to manage Medicare premiums
According to Votava, one of the biggest mistakes retirees make is failing to incorporate Medicare costs into their overall retirement plan.
“As the old saying goes, ‘Planning pays off,'” she said. “The biggest error I see is that people do not plan ahead and are then shocked when they encounter the real fixed costs of health care.”
Strategies worth discussing with an adviser include:
- Roth conversions before Medicare enrollment
- Managing capital gains
- Coordinating required minimum distributions
- Timing large withdrawals
- Spreading income-generating events across multiple years when possible
Votava also pointed to health savings accounts (HSA) as a valuable planning tool.
“Money in an HSA does not increase a person’s Medicare income calculation, yet is available to help pay health care costs without triggering higher IRMAA surcharges,” she said.
Avoid costly Medicare mistakes
Beyond IRMAA, Votava said retirees should pay close attention to Medicare enrollment decisions and annual plan reviews.
“Knowing when to enroll in Medicare to avoid lifetime penalties is important,” she said.
She also warned against assuming Medicare coverage remains unchanged from year to year.
“It’s a big mistake to think that all Medicare supplements and drug plans are the same and that those plans remain the same year to year,” Votava said.
Changes in premiums, provider networks, drug formularies and out-of-pocket costs can make annual plan reviews worthwhile.
If you’re concerned about Medicare’s long-term solvency, treat the trustees report as an early warning, not a crisis
The annual Medicare Trustees Report serves as an early warning system for policymakers. It is not a declaration that Medicare is failing or that beneficiaries are about to lose coverage.
The report projects that the Hospital Insurance Trust Fund will be depleted in 2033. At that point, ongoing program income would be sufficient to cover about 89% of scheduled benefits if Congress took no action.
But what happens then remains uncertain.
According to Lindsey Copeland, director of federal policy at the Medicare Rights Center, there is no automatic process or historical precedent dictating how available funds would be allocated if the trust fund were depleted.
The report should therefore be viewed as a warning signal that action may be needed, not as evidence that Medicare is on the verge of collapse.
Marilyn Moon, a former public trustee of the Medicare and Social Security trust funds, has argued that trust fund depletion projections should not be viewed as a judgment about Medicare’s success or as a signal that benefits must be cut. Instead, they are intended to provide policymakers with advance notice so they can act before financing problems become more severe.
Don’t focus solely on the trust fund
Copeland cautioned against viewing the Part A trust fund in isolation.
Medicare’s financing challenges extend beyond hospital coverage and include rising costs throughout the broader program.
At the same time, Votava believes consumers should prepare for the possibility that out-of-pocket costs continue to rise regardless of what Congress ultimately decides.
“I think the trends toward higher out-of-pocket costs and limited benefits will continue to worsen,” she said.
For retirees and pre-retirees alike, the practical implication is straightforward: Build flexibility into your retirement plan and assume health care costs will consume a growing share of your budget.
Plan for uncertainty rather than trying to predict reforms
Congress has historically acted when Medicare financing challenges have become pressing. The challenge for retirees is that no one knows exactly what form future reforms might take.
Potential changes could include:
- Higher premiums
- Increased cost-sharing requirements
- Changes to Medicare-related taxes
- Modifications to eligibility rules
- Adjustments to provider payments
- Revenue increases designed to strengthen the program
Rather than trying to predict the outcome, retirees may be better served by preparing for a range of possibilities.
That includes maintaining adequate emergency reserves, stress-testing retirement plans against higher health care costs, building dedicated health care reserves, incorporating long-term care costs into retirement projections and managing income to reduce the impact of Medicare premium surcharges.
Encourage lawmakers to act sooner rather than later
The trustees repeatedly note that earlier reforms provide policymakers with more flexibility and allow changes to be phased in gradually rather than implemented abruptly.
Copeland said beneficiaries and advocates should encourage lawmakers to pursue thoughtful, beneficiary-centered reforms rather than last-minute fixes.
According to the Medicare Rights Center, reforms should maintain Medicare’s universality, protect existing benefits and consumer protections, and preserve the program’s ability to meet beneficiaries’ evolving health care needs.
Votava likewise believes voters have a role to play.
“It’s critically important that voters let their elected officials know how critical these issues are,” she said. “It’s a bipartisan issue.”
The bottom line
The trustees report’s message is not that Medicare is disappearing. It is that health care costs are likely to consume a growing share of retirement income in the years ahead.
Whether Congress acts next year or several years from now, retirees who build health care costs, long-term care expenses and Medicare premiums into their plans today will likely be better prepared for whatever changes come next.
The greater risk may not be trust fund depletion itself. It may be failing to account for rising health care costs while policymakers work through the difficult task of securing Medicare’s long-term future.
