The Rising Burden of Health Spending on Seniors

Health | Policy Reports

No. 297
Thursday, February 01, 2007
by Liqun Liu, Andrew J. Rettenmaier and Zijun Wang

Executive Summary

The United States spends about 17 percent of its national income on health care, the highest in the world.  Some have wondered how high spending can go and what difference it will make.  In thinking about that question, the experience of our senior citizens provides a vital clue.  

  • Today, more than two of every five dollars of total potential consumption by the elderly (43 percent) is health care.
  • In just 17 years (by 2024), health care will equal 50 percent of seniors' total consumption.
  • For the oldest seniors - age 75 and older - health care already makes up more than half of all they consume.

Much of seniors' health spending is paid not by seniors themselves, but by public and private third parties like Medicare, Medicaid and previous employers.  However, as spending on their health care rises, seniors will be asked to devote an increasing share of their own incomes to pay for it, crowding out other items like food, housing and travel.

  • Today, seniors spend 17.2 percent of their cash incomes on health care, on the average, including out-of-pocket expenditures, as well as premiums for Medicare and individually purchased Medigap insurance.
  • That level will grow to almost one out of every four dollars of income (23.5 percent) by 2030, and by midcentury seniors will potentially spend almost one-third of their cash incomes (31.4 percent) on health care. 

Another way to look at health care spending by the elderly is to compare their total health consumption to their money incomes:

  • Including all the spending by third parties, an amount approaching two-thirds of seniors' cash incomes is currently spent on health care.
  • In another three decades (by 2039), an amount equal to 100 percent of seniors' cash incomes will be spent on health care. 

Since Social Security represents such a large portion of seniors' retirement income - particularly for older seniors - examining health spending as a percentage of Social Security benefits is also informative:

  • Today's seniors spend from their own resources an amount equal to 44.5 percent of their Social Security benefits on health care.
  • That amount will almost double (to 81.3 percent) by midcentury.

If health care spending rises as expected, seniors will likely be called upon to share the burden.  That means current and future workers will need to extend their time in the labor market - or save and invest more money while working - to prepare for the higher expected health care costs waiting for them in retirement.

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