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2003-12-09 -- Retirees Will Not Have Adequate Funds for Health Care Costs

Kaiser Daily Health Policy Report, Tuesday, December 09, 2003


U.S. retirees in 2030 will have a combined $45 billion in annual
income less than required to cover basic living expenses and the cost
of nursing home or home health care, according to a study released
last week by the Employee Benefit Research Institute in association
with the Milbank Memorial Fund foundation, the Washington Post
reports.

In the study, EBRI researchers Jack VanDerhei and Craig Copeland
developed a computer model that uses traditional pensions, 401(k) and
related retirement accounts, Social Security and wealth in the form of
home equity to estimate retiree annual incomes; the model does not
account for additional savings such as stock holdings.

Milbank President Daniel Fox said that the $45 billion represents the
amount that federal and state governments will have to "come up with
to pay for care for retirees unless there is some breakthrough in
medical costs or a substantial change in savings behavior by younger
people," the Post reports.

The results of the study also may indicate future problems for state
budgets, many of which today are "being eaten up by the costs of
Medicaid," because the "aging population will drive costs higher," the
Post reports. According to Diane Rowland, executive director of the
Kaiser Family Foundation Commission on Medicaid and the Uninsured,
elderly beneficiaries today account for 9% of Medicaid enrollment but
27% of program expenditures (Crenshaw, Washington Post, 12/9). The
study is available online.



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Washington Post, Sunday, December 7, 2003


A Lost Retirement Dream for Boomers?
By Albert B. Crenshaw


There has certainly been no shortage of alarms sounded recently about
the financial status of future American retirees, especially the giant
baby boom generation, which begins turning 65 in 2011.

But a big new study released last week has now put some numbers on the
shortfall -- and they are grim.

In the aggregate, retirees in this country in the year 2030 will be at
least $45 billion short of the income they need to cover basic living
expenses plus expenses associated with nursing-home or even home
health care. From 2020 to 2030 the aggregate deficit will be at least
$400 billion, according to the study, which was done by the Employee
Benefit Research Institute here, in collaboration with the Milbank
Memorial Fund, a New York-based foundation.

Those numbers may not seem very meaningful to individuals -- who can,
and apparently do, say, "It won't happen to me." But they should make
policymakers' hair stand on end, especially at the state level. They
are what government in some form will have to come up with unless
there is some breakthrough in medical costs or a substantial change in
savings behavior by younger people. If those things don't happen,
government will have to find the money or, as Milbank Memorial Fund
President Daniel M. Fox said, "tolerate more human suffering."

How that can be managed isn't clear. Already, some state treasuries
are being eaten up by the cost of Medicaid, the state-federal medical
insurance program for low-income people. In Massachusetts, for
example, where already one resident in eight is 55 or older, Medicaid
consumes roughly $7 billion out of a state budget of $22 billion,
state Sen. Harriette L. Chandler (D-Worcester) said at a forum on the
study last week.

An aging population will drive costs higher. While the elderly
constitute 9 percent of Medicaid enrollees, they account for 27
percent of the program's spending, according to Diane Rowland of the
Kaiser Family Foundation.

Employee Benefit Research Institute researchers, beginning with
Oregon, and then going on to Kansas and Massachusetts, have built an
increasingly sophisticated computer model that they believe capable of
figuring not only the trends in saving and investing but also the
expenses retirees are likely to face.

Researchers Jack VanDerhei, who is also a professor at Temple
University, and Craig Copeland have now extended their findings to the
entire country. Their model projects retiree income from traditional
pensions, 401(k) and similar retirement accounts, and Social Security,
and takes into account wealth in the form of home equity. It does not
include savings beyond retirement accounts, which may mean that some
people, especially older ones, are better off than they seem. However,
for all too many Americans, savings outside of their home equity and
retirement accounts are extremely modest, especially among those who
are not in the highest income groups.

Worst off, the study found, will be those who are unmarried at
retirement, particularly women. Many factors contributed to that
finding, especially women's lower lifetime earnings and long life
expectancies.

The brightest spot in the report is its conclusion that a great many
younger people could significantly increase their chances of having
enough money for basic expenses throughout retirement by boosting
savings by 5 percent of their pay. That wouldn't work for most older
people or for the lowest-income people of any age, but it does suggest
that the possibility exists, mathematically at least, of avoiding the
worst that the future might hold.

Unfortunately, experience so far indicates that such an increase in
savings is unlikely to happen without major behavioral or policy
changes.

Boston College economists Alicia H. Munnell and Annika Sunden, in a
forthcoming book on 401(k) plans, note that the assets reported in
retirement accounts don't jibe with reported contribution rates.
"Every study . . . indicates that those who join 401(k) plans make
significant contributions across age and income groups. Yet they do
not appear to end up with substantial asset accumulation. How does
this happen?" they write.

Two factors -- "leakage," the tendency of people to cash in and spend
401(k) plan balances when they change jobs, and late starting of
contributions -- play key roles, Munnell and Sunden conclude. "In
401(k) plans a major risk to future accumulations is . . . the failure
to save continuously from the beginning of one's working life," they
write.

Against that background, the federal government is racking up deficits
that may make it very difficult for it to rescue states or penniless
retirees. The Bush administration's proposals for various kinds of
tax-free savings accounts could also undermine the willingness of
employers, especially small ones, to offer even 401(k) plans, leaving
even more people to their own devices for retirement.

There are, though, policy changes that could help.

. Former Treasury benefits tax counsel J. Mark Iwry pointed out at the
forum that tax credits, rather than tax deductions, would make
retirement saving more attractive because deductions are of little
value to those in low- and zero-tax brackets. Further, he said,
program changes such as automatic enrollment in 401(k) plans for new
employees and default mechanisms that would put them in
age-appropriate investments unless they opt out would boost
participation and make k-plan investments more effective.

. Improvements in marketing of long-term-care insurance are of great
interest to the states because such coverage could take a lot of the
pressure off Medicaid. Four states have deals that allow people who
buy a certain amount of this insurance to qualify for Medicaid without
being destitute if they outlive their private policies. But other
states have been barred by federal law since 1993 from adopting such
arrangements.

. Making annuities more attractive would also help, because they offer
protection against outliving your income -- but it's tough to see how
it could be done without government intervention. Traditional pensions
have long provided lifetime annuities for beneficiaries, but they are
becoming less common. Employers are allowed to offer annuities as an
option in a 401(k) plan, but few do. Private annuities are expensive,
and people don't like the idea of losing their investments if they die
early.

Investor nation: The number of U.S. households that own mutual funds
fell to 53.3 million in July, (47.9 percent of total households) from
54.2 million (49.6 percent) in July 2002, according to a survey by the
Investment Company Institute, a fund-industry trade group. The survey
also found that the number of individuals owning mutual funds slipped
to 91.2 million from 94.9 million in 2002. About 33 percent of all
households -- or 36.4 million -- owned mutual funds inside
employer-sponsored retirement plans, the institute said.