Commentary: GAO Report Highlights IRR Challenges, Fails to Factor In Rising Health Care Costs

by Ron Mastrogiovanni, Founder and CEO, HealthView Services

The U.S. Government Accountability Office (GAO) released a Retirement Security report earlier this month.  The title summarizes the takeaway:  “Better Information on Income Replacement Rates Needed to Help Workers Plan for Retirement.”

The report highlights a number of factors that need to be considered when calculating a client’s income replacement rate (or ratio), the percentage of income workers will require to meet financial needs during retirement.  These include spending patterns, household expenditures, and pre-retirement income.

While the report is comprehensive, one variable is understated: the impact of rising health care costs in retirement.

HealthView highlighted this issue in a white paper published at the end of last year: “Retirement Health Care Costs and Income Replacement Ratios.”  The paper’s main point is that replacement ratios significantly underestimate future health care costs.

Our research highlighted some key issues.  The first, when working, employees are generally accountable for approximately 25% of health care premiums.  In retirement, without employer subsidies, retirees are responsible for 100% of their medical expenses, which include Medicare, supplemental insurance premiums, and other out-of-pocket costs such as co-pays, hearing, vision, and dental.   Data indicates that an average retiree may have to pay two to three times more for comparable health care coverage than they did while in the workforce.

The HealthView white paper also focuses on health care inflation, which is projected to drive costs higher by approximately 6% per year for the foreseeable future. This estimate is consistent with a year-end summary from the Centers for Medicare and Medicaid, which expects retirees to endure at least eight years of health care inflation between 5% and 7%.  Driven by inflation, health care costs are expected to grow at more than twice the rate of annual Social Security COLAs.

Neither are factored into the GAO report.

HealthView’s data, which is based on actuarial claims data from 50 million cases and incorporates expected health care inflation (among several other variables), shows health care costs will be dramatically higher than those projected by the GAO.

The GAO report correctly recognizes that if Americans are to rely on IRR calculations, they should be personalized and include health care expenses.  When it comes to health care – it is essential that realistic projections of future costs are incorporated into IRR calculations – if we are to meet the standard of having better information that leads to a more valuable IRR-based guide to retirement planning.

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HealthView Services ( is the leading provider of retirement health care planning applications that include Medicare, long-term care and Social Security optimization.  HealthView believes that a health care cost savings strategy should be a foundational component of retirement planning. The company’s methodology initiates advisor/client conversations that ultimately lead to retirement income optimization.  Ron Mastrogiovanni is a RIIA board member.  The Views expressed are those of HealthView Services and do not necessarily represent those of RIIA.

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