Posted on 09 April 2009
By Mark Miller
Autoworkers are bracing for more cuts in retirement health benefits under Washington’s terms for bailing out General Motors and Chrysler. But Detroit’s struggles are just an early warning of a much larger health care train wreck looming for older Americans.
Health care poses one of the largest threats to the retirement security of Americans. It’s a crisis right now for anyone who’s been forcibly retired by the economic crisis before age 65, when Medicare coverage kicks in–or anyone else who’s fallen through the cracks of our frayed health care safety net. But even for Americans over 65, out-of-pocket health care expense is eroding spending power and economic security.
This is a complex issue, but it boils down to this: The cost of health care is soaring, and so is utilization–the amount of health care we consume. Meanwhile, the amount of retirement income available to pay for it all is shrinking.
A couple of fresh data points:
– Retiree health care expenses rose 6.7 percent in 2009, and have jumped 50 percent since 2002, according to Fidelity Investments, which has been tracking this since 2002. A 65-year-old couple retiring in 2009 will need approximately $240,000 out-of-pocket to cover medical expenses in retirement. That includes premiums for Medicare Parts A, B and D and expenses outside Medicare, such as over-the-counter medications, dental care and long-term care.
– Long-term care is a potentially explosive wild card that most Americans have done nothing about. By most estimates, about one-third of us will need nursing home care at some point in our lives–and it’s expensive, with the annual cost of a nursing home hovering around $70,000 for a semi-private room last year, according to the Center for Retirement Research (CRR) at Boston College.
About a third of that cost will come out-of-pocket for most people, according to government data. Medicare picks up a relatively small portion of long-term care costs, while Medicaid covers care for people are truly indigent or spend themselves into indigence.
Few Americans have insured against this risk with long-term care insurance. Just 14 percent of elderly Americans had long-term care policies as of 2006, the CRR reports–probably because the policies cost an average of $3,500 per year for a 65-year-old individual, are complicated to buy and provide varying degrees of coverage.
Meanwhile, our ability to pay for all of this is shrinking. Retirement portfolios have been decimated by market losses and declining employer matches. Job losses close to retirement have an especially devastating impact on income available in retirement. And Social Security will provide a smaller percentage of overall income in the years ahead, according to the CRR.
And the number of companies that provide health coverage to retirees is shrinking, as the Detroit situation shows. The Big Three automakers provide health care to more than one million retirees and their dependents, although they collectively threw their obligations into a standalone trust fund in 2007 managed by the United Auto Workers. The arrangement is under re-negotiation, with more benefit cuts likely.
What does it all mean for retirement security? The CRR has an index it uses to answer this question, called the National Retirement Risk Index (NRRI), with “risk” defined as the likelihood that individuals will not be able to maintain their standard of living in retirement.
Excluding health care, the NRRI shows that 44 percent of Americans are at risk; when health care is included in the calculation, 61 percent are vulnerable. And those projections are conservative because they make some optimistic assumptions about how Americans will manage their money in the years ahead.
The Obama Administration already has taken a small step toward controlling health care costs, announcing changes for next year’s Medicare Advantage program aimed at reducing cost to participants. But that’s just the start of a very necessary debate we’re going to have about health care reform this year.
As these numbers show, the stakes couldn’t be higher.