Falling Inflation May Be Too Late to Save Retirees From Rising Healthcare Costs

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Cooling inflation is cold comfort to older adults who continue to struggle with the lasting impact of higher prices, a new survey finds.  

Consumer prices rose a smaller-than-expected 5% over the past year, according to government data released Wednesday. Yet many older adults have already taken serious measures to cope with higher prices in recent years, making financial recovery difficult, according to The Senior Citizens League, the nonprofit organization that conducted the survey. Compounding the problem, the measure of inflation that’s used to calculate the annual cost-of-living adjustment (COLA) to Social Security benefits doesn’t accurately reflect seniors’ spending patterns, the survey noted.

Of 1,055 lower to middle-income retirees, 26% reported draining a retirement account over the past 12 months, up from 20% in the third quarter of 2022. The survey also found that 45% of respondents carried credit card debt for more than 90 days—more than in surveys conducted in 2022, and a particular concern given average credit card interest rates are now topping 20%.

Many older adults have resorted to such measures despite an 8.7% cost-of-living boost to their Social Security benefits this year. While welcome, the raise came late, taking effect in January after prices for essentials rose precipitously in 2022. 

The annual COLA is based on a subset of the overall inflation index known as the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which rose 4.5% over the past year. That index assumes consumers spend about 7% of their household budget on healthcare, yet more than half of survey participants reported spending at least 16% of their income on healthcare.

This disconnect is significant because Medicare premiums and out-of-pocket costs are among the fastest-growing costs in retirement. An inflation measure that doesn’t adequately capture them can shortchange older adults, The Senior Citizens League said. The survey asked respondents about Medicare premiums as well as costs not covered by traditional Medicare, including vision and dental services. It also included long-term care costs, which the government insurance program doesn’t cover.

In 2023, an average, healthy 65-year-old couple will receive $31,701 in Social Security benefits and pay $14,495, or 47% of their total benefit, to cover healthcare costs, according to calculations from HealthView Services, a firm that provides retirement healthcare cost data and tools to financial advisors. As the COLA continues to fall short of compounding medical inflation—and as the couple consumes more costly services as they age—by 85, healthcare costs will devour 92% of their total benefit, HealthView projects. 

The Senior Citizens League and others have advocated switching the basis for the COLA to the Consumer-Price Index for the Elderly (CPI-E), an index that weighs healthcare higher. Sen. Bernie Sanders (I, VT) and Sen. Elizabeth Warren (D, Mass.) included that provision in their recent bill to expand Social Security. The Social Security actuary estimated the move would increase the effective COLA by 0.2 percentage point on average.

If inflation continues to fall at the current rate, the COLA for 2024 will be lower than 3%, according to projections by The Senior Citizens League. 

Write to Elizabeth O’Brien at [email protected]