Medical costs quietly drain nearly a third of Social Security income for retirees

At a time when “affordability” dominates political debate, a new analysis underscores a less visible pressure point for older Americans: the cost of staying healthy in retirement.

Even with Medicare, retirees continue to shoulder thousands of dollars a year in premiums, copays, and services Medicare doesn’t cover — expenses that quietly eat into fixed incomes. 

Using data from the Health and Retirement Study between 2018 and 2022, researchers examined how much of retirees’ income is left over after paying out-of-pocket medical costs, a measure they call the “post-OOP ratio.”

The answer is sobering. For the median retiree in 2022, only 71% of Social Security benefits remained after medical spending. When all income sources are counted — including pensions and retirement accounts — the typical retiree still lost about 12 percent of total income to health care costs.

“These are expenses people can’t easily cut,” the research notes. Unlike travel or dining out, medical spending is largely non-discretionary, making it a more accurate gauge of retirees’ real purchasing power.

Medicare helps — but doesn’t eliminate costs

Medicare provides a critical safety net, but it is far from free. Part B premiums, drug coverage, copays, and uncovered services like dental, vision, and hearing care add up quickly. In 2022, the median retiree spent $5,444 out of pocket on health care alone.

Premiums account for the largest share of that spending, particularly for Medicare Part B and supplemental insurance. Higher spenders face additional costs from copays and services Medicare doesn’t cover, pushing total expenses even higher.

Notably, these burdens didn’t ease — or worsen — much over time. Adjusted for inflation, out-of-pocket costs remained relatively stable from 2018 through 2022, even as the pandemic disproportionately affected older adults and overall inflation surged.

Who feels the pinch most?

The impact of medical costs varies widely. About 5% of retirees effectively see their entire Social Security check wiped out by health expenses. At the other end of the spectrum, higher-income retirees retain a much larger share of their income after medical spending.

Income level plays a predictable role: retirees in the highest income quintile kept about 94% of total income, while those in the lowest quintile retained 82%, and just 76% if Medicaid recipients are excluded.

Health status matters too, though less than expected. Retirees with chronic conditions or difficulties with daily activities did not see dramatically lower post-OOP income shares, largely because Medicare and supplemental coverage cushion some of the additional costs. Those who never reported chronic conditions fared best, mostly because they tended to have higher overall incomes.

The supplemental coverage divide

One of the clearest differences comes down to insurance coverage beyond basic Medicare.

• Medicaid recipients were best protected, keeping the largest share of both Social Security and total income, thanks to minimal premiums and cost sharing.
• Medicare Advantage enrollees, now nearly half of all beneficiaries, generally fared better than those without supplemental coverage, though premiums still reduced take-home income.
• Retirees with no supplemental insurance faced the greatest risk, especially when unexpected medical needs arose.

Interestingly, when looking strictly at Social Security income, retirees with only traditional Medicare sometimes did better than those with Medicare Advantage or retiree health insurance — largely because they paid lower premiums. Once total income was considered, however, those differences largely disappeared.

Why it matters now

The findings arrive as further changes to Medicare drug coverage are on the horizon. The Inflation Reduction Act includes caps on insulin costs, limits catastrophic drug spending, and introduces a $2,000 annual out-of-pocket cap by 2025. While these changes could provide relief, their long-term impact remains uncertain.

At the same time, Social Security faces its own funding challenges, raising anxiety among retirees who already feel squeezed.

The bottom line: even when benefit checks look adequate on paper, health care costs tell a different story. With nearly a third of Social Security income going toward medical expenses for the typical retiree, many older Americans are navigating a far more fragile financial reality than headline benefit numbers suggest.