New study shows
average lifetime benefits are more than one third of 401(k)/IRA balances
In a new study, my
colleagues and I tried to figure out how valuable the Medicare Part D program
was to individuals — basically whether they should consider it a big deal or a
little deal as they plan for retirement.
First, some background. The Medicare Part D program, launched in 2006,
extended outpatient prescription drug insurance to almost all Americans over
age 65. This expansion of Medicare was a response to the rapid growth of drug
costs and the resulting strain on patients’ budgets. Participants in Part D
generally pay monthly premiums, face an annual deductible, and make copayments
on drug purchases above the deductible. The key point considered in our study
is that these payments typically are less than the value of the drugs received.
Medicare Part D subsidizes prescription drug
coverage in three ways. First, it reduces the price that individuals have to
pay for a Part D insurance plan by paying insurance companies a lump sum per
enrollee (adjusted for certain risk factors) that covers about three-quarters
of premiums. Second, it allows low-income enrollees to obtain Part D plans for
a much reduced monthly premium with lower cost-sharing. Third, Medicare pays
80% of drug costs over a certain threshold ($8,140 in 2019). As a result,
insurers face a relatively small risk of having to spend huge sums for the
small minority of very expensive enrollees, which filters through to all
beneficiaries in the form of lower monthly premiums.
How these various forms of subsidy affect any
particular individual depends on many factors, such as income level, drug
usage, gender, etc. Therefore, we tackled a simpler task of estimating the
average lifetime Part D subsidy for a typical 65-year-old in 2019.
The methodology is straightforward. The data
come primarily from the annual Medicare Trustees Report.
For each year, total beneficiary premiums are subtracted from total program
nonadministrative costs to measure the total subsidies (premium subsidies,
low-income subsidies, and catastrophic coverage payments). This total
difference is then divided by the number of beneficiaries in that year to get
the average participant subsidy.
This exercise is done for each year from
2006-2018 and extrapolated from 2019-2073 in order to project net subsidies per
capita out to age 120. These values are then discounted back to age 65, and the
discounted net annual subsidies are summed.
Since lifetime benefits depend on assumptions
about interest rates, life expectancy, and the future path of net subsidies,
the figure below shows the expected lifetime subsidy of Part D for a
65-year-old in 2019 under the low, intermediate, and high-subsidy scenarios. In
the low-subsidy scenario — with high mortality, high discount rates, and low
growth in net subsidies — the expected subsidies for an individual entering the
program in 2019 are about $23,000, rising to $35,000 in the intermediate
scenario, and $57,000 in the high-subsidy scenario.
To put these numbers in context, the median 401(k)/IRA account balance for
individuals ages 55 to 64 was only $104,000 in 2016. Thus, the intermediate
subsidy estimate corresponds to one-third of the financial assets held by the
median individual approaching retirement. Part D, therefore, represents a
substantial transfer of wealth to individuals reaching age 65. The size of this
transfer may be underappreciated because it is distributed as an in-kind
benefit, filtered through private insurers, and distributed slowly over the
duration of an individual’s life.
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