How Would Social Security Changes Affect
Medicare Costs and Seniors’ Out-of-Pocket Spending?
Melissa M. Favreault
The Urban Institute
17th Annual Joint Meeting of the Retirement Research Consortium
August 6-7, 2015
Washington, DC
The NBER Retirement Research Center, the Center for Retirement Research at Boston College (CRR), and the
University of Michigan Retirement Research Center (MRRC) gratefully acknowledge financial support from the
Social Security Administration (SSA) for this conference. The findings and conclusions are solely those of the
authors and do not represent the views of SSA, the National Institute on Aging, any agency of the federal
government, the CRR, or the Urban Institute.
Favreault gratefully acknowledges funding from the National Institute on Aging (R01AG034417, Principal
Investigator: Michael E. Chernew) for the larger model on which this work is based. Michael Chernew, Thomas G.
McGuire and Laura A. Hatfield, all from the Department of Health Care Policy at Harvard University Medical
School, provided much of the theoretical and empirical framework that underlies these analyses. A panel of
technical advisors provided additional input into the model specification. The panel included Todd Caldis and
Liming Cai of the Centers for Medicare and Medicaid Services, Paul Fronstin of the Employee Benefits Research
Institute, Joseph Newhouse of Harvard University, and Robert Reischauer and Stephen Zuckerman of the Urban
Institute. All errors are solely those of the authors.
Introduction
Under current law, Medicare cost shares are expected to increase faster than incomes for
Social Security beneficiaries (Johnson and Mommaerts 2010). Some hypothesize that as
beneficiaries pay more for health care, they may ultimately demand less of it, with important
implications for the long-range sustainability of the Medicare program and beneficiaries’
economic well-being.
For example, Part B premiums, which are today deducted directly from Social Security
payments, were less than 2.6 percent of the average Social Security benefit in 1980. By 2014,
this had increased to closer to 8.3 percent. Adding in Part D premiums, the average Medicare
beneficiary can at present expect to pay close to 10.8 percent of his or her Social Security benefit
on Medicare premiums. Since 2007, higher-income beneficiaries have begun to pay more
through Medicare’s income-related premium. These provisions currently affect about 5 percent
of Medicare beneficiaries, and this share is expected to increase modestly in coming decades
(Cubanski, Neuman, Jacobson, and Smith 2014).1
Further, Medicare’s benefit package is incomplete. Most Medicare beneficiaries purchase
supplemental insurance to cover some of these gaps (Medicare Payment Advisory Commission
2015). Beneficiaries pay premiums for this coverage and make out-of-pocket payments to
providers, including in the form of deductibles and copayments. This point-of-service (nonpremium) spending varies greatly by age, disability status, insurance type, and income. McArdle,
Stark, Levinson, and Neuman (2012) point out that Medicare is not as highly subsidized as
typical large-employer health insurance plans that cover many working-age adults.2
We explore how Social Security adequacy—and income adequacy more broadly—are
likely to shift as Medicare continues to require larger income shares from most retirees using
baseline assumptions (Boards of Trustees of the Federal Hospital Insurance and Federal
Supplementary Medical Insurance Trust Funds 2014, Shatto and Clemens 2014). We then
examine the effects of alternate cost growth trajectories on these patterns. Although health care
1
Starting in 2018, these cost shares for higher income beneficiaries will increase further as a result of recent
legislation.
2
At the same time that Medicare premiums and cost shares represent an increasing, substantial share of income, the
program still offers older and disabled adults in the U.S. extensive protection at subsidized rates. Although
historically payroll taxes have comprised most of Medicare’s income and financing has expanded to include revenue
from taxation of Social Security benefits and an additional Medicare tax, Medicare receives general revenue
transfers (Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust
Funds 2014). Such subsidies have likely limited income effects within Medicare to date (McGuire 2014).
spending growth has slowed markedly in recent years, the future trajectory remains uncertain,
with important implications for families and the nation’s fiscal health (Auerbach, Gale, and
Harris 2014, Cutler and Sahni 2013, Elmendorf 2013). We next examine the effects of changes
to Social Security to improve long range fiscal balance.
For all the options, we look at outcomes at various points in time, over two- and threeyear periods, and also from age 65 to death. These longer-range analyses contribute to growing
literatures on lifetime health care costs (Alemayehu and Warner 2004, Bhattacharya and
Lakdawalla 2006, Gaudette, Tysinger, Cassil, and Goldman 2015, Rettenmaier 2012, Spillman
and Lubitz 2000) and the persistence of high spending (Garber, MaCurdy, and McClellan 1998,
Pauly and Zeng 2004, Riley 2007).
Methods and data
We integrate a sophisticated model of beneficiary insurance choice and spending,
including income effects and demand response, into the Urban Institute’s Dynamic Simulation of
Income Model (DYNASIM). An appendix to our forthcoming paper describes this model in
detail (Hatfield, Chernew, Favreault, and McGuire forthcoming).3 DYNASIM has the capacity to
project total retirement incomes and capture changes to Social Security, taking into account ongoing changes in the composition of the Medicare and Social Security beneficiary populations.
We calibrate many of the model’s projections to the intermediate demographic and economic
assumptions of the 2014 Social Security Trustees Report (Board of Trustees, Federal Old-Age
and Survivors Insurance and Disability Insurance Trust Funds 2014). The model incorporates an
extensive array of socioeconomic differentials and takes into account interdependencies between
outcomes (for details, see Smith, Favreault, and Johnson 2014).
Results
Our baseline projections show that Medicare significantly protects beneficiaries,
especially those who survive to very old age. The program’s financing structure is highly
progressive. Nonetheless, older adults with relatively low incomes pay much larger shares of
3
At this model’s heart is a technology parameter that reflects innovations in medical care. Demand for innovations
can be dampened when families devote large shares of income toward health costs. We estimate model parameters
using data from the 2007 through 2009 Medicare Current Beneficiary Survey (MCBS) and draw key conceptual
parameters from the literature.
their income on health services than those with higher incomes. We project this burden to
increase steadily in coming decades. High costs are not uncommon and are frequently persistent.
Faster cost growth would further increase the burdens on lower-income families.
Similarly, Social Security benefit reductions that affected lower-income households would leave
many families paying very large shares of their remaining income on health. Shifts toward
lower-cost providers would provide limited offsets to the increased costs for some families.
Policymakers should be cognizant of the pressure that such scenarios could exert on families as
well as government coffers.
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