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Since healthcare is more expensive in older people, Medicare costs should rise in the future, right? Well, actually that could be disputed. Medicare costs may rise as a result of new and more expensive treatments, but increasing longevity by itself can lower costs. Since it surprises most people to hear it, follow the logic carefully.
It costs about $171,000 per lifetime to run Medicare or about $13,000 per year at a life expectancy of 78. That's the figure of the census bureau all right, but it's the life expectancy at birth. Life expectancy for a person age 65 is in the 80s, so the average yearly Medicare cost is closer to $5000. If we look ahead a few years, it is easily possible to foresee a life expectancy of 91. That would be a yearly cost of around $6000. But you would have to pay medical bills for an extra few years so costs wouldn't go down, right? There are three possibilities.
One possibility is that the costs of the elderly are mostly terminal care costs. Since you only die once, increasing longevity may mean that you typically increase the length of being old but healthy, followed by a single terminal illness. In that case, average yearly costs should go down with increasing longevity. Another possibility is that living six or so years longer just gives you the time to run up more bills for more illnesses. You might have time for two fatal illnesses, from one of which you recover. There's still a third possibility. A lot of people in their late fifties may store up illnesses as a backlog which emerges while Medicare begins paying the bills but gradually subsides. What does the data show?
The data shows that aggregate costs are slowly growing at a rate well below 6%, so if your savings are growing at 6%, you are gaining on it as you get older. If you invest $85,000 at 6% on your 65th birthday, Medicare will consume the whole amount by age 78. But on the other hand, if you invest $40,000 at age 65, Medicare will only consume it (half as much, notice) by the age of 91. It should certainly be clear that Medicare costs are growing considerably more slowly than 6%. They are growing, but a shrewd investor could certainly beat them. And since the Federal Reserve targets a deliberate annual 2% inflation of the currency, Medicare costs net of inflation are growing considerably slower than 4% a year, for whatever reason. If Medicare costs should rise, or if the economy worsens, there's probably a tipping point where increased longevity becomes a bad thing for your financial health. But we haven't reached that point, yet.
If some young math genius invests $310 every year at 6% from age 25 to age 65, he could buy out his Medicare entitlement for $50,000. When life expectancy was 78, he could have bought it out for $85,000. Pre-payment would have cost $520 per year, 25 to 65, at 6%. If some enlightened government would stop collecting Medicare premiums and Medicare payroll deductions, our math genius could have it for half the price. And the government? They could stop borrowing from the Chinese, an amount equal to half the cost of the program, so it's a win-win situation, right? Maybe it's even better than another sustainable growth factor.
Originally published: Wednesday, September 10, 2014; most-recently modified: Wednesday, May 15, 2019