Many financial professionals who advise baby boomers say they are trying to prepare clients for the possibility that Medicare might collapse, or sharply curtail benefits, just when they need post-retirement medical care the most.
Already, most younger boomers “want to count on being financially independent on their own,” says Tracey Baker, a Fairfax, Va., retirement planner who serves as chairman of the National Capital Area chapter of the Financial Planning Association, Denver.
Now, economists at the federal Centers for Medicare and Medicaid Services have added to anxiety about the future of Medicare by publishing good news about overall U.S. health care spending along with frightening news about Medicare spending.
The good news is that the economists’ paper, which appears in the health policy journal Health Affairs, shows that overall U.S. health care spending growth slowed to 7.9% in 2004, down from 8.2% in 2003. The figure is still higher than the general inflation rate, but now it’s stayed in the single digits for three straight years.
But the economists note in the same paper that the rate of Medicare spending growth increased to 8.9% in 2004, up from 6.6% in 2003. Part of the increase was due to changes in program structure, such as a congressional mandate to increase reimbursement rates for rural health care providers and some managed care plans, but part of the increase was due to beneficiaries’ increased use of physician services and home health care, the economists write.
Medicare spending growth accelerated in 2004 even though the huge new Medicare Part D prescription program had not yet started paying claims.
Meanwhile, despite all the recent fuss about the solvency of the Social Security trust funds, economists emphasize that Social Security seems likely to stay solvent for at least a few decades. Meanwhile, the Medicare trust fund that covers hospital care and home health care could run out of cash as early as 2013, when the oldest boomers are 67, say analysts at AARP, Washington.
Even under the “intermediate cost” projection, the Medicare hospital care trust fund could run out of cash by about 2020, when the oldest boomers are about 74, the analysts write.
What can financial professionals and their clients do about this situation?
Aetna, Hartford, has worked with the FPA to help boomers prepare for any future retiree health climate by making realistic projections of their post-retirement health costs and making efforts to fund those costs.
Americans “don’t tend to think about health in retirement,” says Dr. Dexanne Clohan, a medical director for national accounts at Aetna. “They tend to include things like their rent or mortgage, their groceries, even travel and entertainment before health.”
Preretirees expect to spend an average of less than $300 per month on health care, but the actual average is about $640, Clohan says.
Worse, “it’s impossible for any of us to know for sure what medical costs and the political landscape will be 15 years from now,” Clohan says.
Flexible Benefit Service Corp., Rosemont, Ill., and Emeriti Retirement Health Solutions, New Windsor, N.Y., are examples of organizations trying to address boomers’ urgent retirement health savings needs by establishing special retiree health savings programs.
Flexible Benefit is aiming at healthy retirees with a new health savings account-based program that will rely on the fact that the HSA law permits workers age 55 and over to make extra-large HSA contributions. Boomers who contribute to Flexible Benefit’s HSA55 accounts and keep the money there could save more than $60,000 over 10 years, the firm says.
In theory, solid investment growth of HSA assets could double or even triple the total for boomers who are able to postpone drawing on the HSA funds until they are in their late 70s.
Emeriti has worked with Fidelity Investments, Boston, and Aetna to set up the Emeriti Program, which uses voluntary employees’ beneficiaries associations to help universities and colleges use pretax cash and academic employees to use after-tax income to prefund post-retirement health care costs.
Down in the trenches, “we haven’t had clients set aside a specific portfolio that’s set aside to fund specific health care needs,” Baker says.
She believes most of her retirement planning clients prefer to start by making realistic cost projections, then use a single account to try to meet overall funding needs.
Creating separate pots for specific post-retirement expense categories might seem too complex for many clients and frighten them away from trying to save anything at all, Baker says.
Unfortunately, even boomers who can make the HSA contributions may have a very difficult time saving enough to fund all of their post-retirement health needs.
Researchers at Fidelity Investments, Boston, have estimated that a typical boomer might need $190,000 just to cover the cost of Medicare co-payments, deductibles and excluded acute-care benefits. That figure does not include the cost of dental care or long term care.
The CMS economists show in their paper that Medicare is spending about $625 per month on care for each beneficiary, suggesting that retirees’ monthly basic health care costs could soar to more than $1,200 per month, not including the effects of general inflation, health care inflation or the aging of the baby boomers, if the Medicare program collapses and beneficiaries have to seek out some kind of public or private program that must rely on current premium revenue to pay claims.
One strategy boomers might follow is to try to hold on to jobs that provide health coverage for as long as possible, even if that means delaying or downsizing plans to travel or do volunteer work.
Another strategy might be for adventurous boomers with no children or children who can afford to travel to move to countries such as Costa Rica that offer a high standard of living and access to affordable post-retirement health care.
In theory, insurers could help boomers who want to stay in the United States cope by setting up prefunded post-retirement health insurance plans. Instead of rolling all 401(k) assets into income annuities, for example, boomers could roll some of their 401(k) assets into health insurance programs that would promise to fill all of customers’ needs for post-retirement acute health care.
So far, no companies have been offering Baker’s clients single-premium prepaid post-retirement health plans, but many clients already have an interest in prepaying LTC insurance premiums, Baker says.
If nothing changes, when will the Medicare trust fund that pays for hospital care, home health care and skilled nursing care go broke?
High cost scenario: 2013
Intermediate cost scenario: 2020
Low cost scenario: 2059
Total Medicare share of U.S. gross domestic product:
2004: 2.6% of GDP
2006: 3.3% of GDP (projection)
2079: 13.6% of GDP (projection)
Source AARP, Washington