Alice Munnell wishes she could persuade policymakers to pay more attention to the rising cost of health care.
Today, the most visible health finance reform efforts deal with access to coverage, rather than the underlying cost of medical care, says Munnell, director of the Center for Retirement Research at Boston College.
But, if current trends keep up, the rising cost of the care itself will pose a threat to the well-being of all Americans, and especially to baby boomers’ retirement finances, Munnell warns.
The trustees of the Medicare trust fund recently predicted that the fund could be empty as soon as 2019, and officials at the U.S. Treasury Department predicted that Medicare and Social Security together could consume about 80% of federal revenue by 2050.
The numbers “are so huge,” Munnell said. “The current system is just not sustainable. It’s going to implode, and God knows what’s going to replace it.”
Munnell’s center has published a National Retirement Risk Index Report that shows that, largely because of the escalation of health care costs, 50% of the U.S. boomers born from 1948 to 1954, and 61% of the boomers born from 1955 to 1964, will be at risk of being unable to maintain their standard of living in retirement.
Even when center researchers looked at boomers who rank in the top third in terms of income, they found that health care costs put about half at risk of being unable to maintain their standard living.
To cover projected out-of-pocket health care costs, a boomer couple retiring in 2010 will need to put about $206,000 in an annuity, the researchers write.
In 2030, a retiring couple might have to put $378,000 in an annuity to pre-fund post-retirement health costs, the researchers say.
These results are similar to those produced by a separate health cost estimation effort sponsored by Fidelity Investments, Boston. Fidelity researchers say a 65-year-old couple that retires this year will need about $225,000 to cover post-retirement medical costs.
The Employee Benefit Research Institute, Washington, has released a worker survey showing that the percentage of U.S. workers ages 25 and older who feel very confident about their ability to take care of post-retirement acute care medical expenses has fallen to 36% this year, from 41% in 2007. Only about 34% of workers now say they expect to have employer-sponsored retiree health benefits, down from 41% in 2007, according to EBRI.
Munnell says she is not sure what to do about rising health care costs.
“We can’t keep doing what we’re doing,” Munnell says. “But I don’t think there’s an easy fix.”
The United States does appear to have room to cut costs, because spending varies widely and appears to have no obvious correlation with quality, Munnell says.
Nationwide Mutual Insurance Company, Columbus, Ohio, provided the grant that paid for the center’s work on the retirement index.
The Boston College retirement cost index “is really one way for advisors to begin to have a conversation with their clients about what [the clients'] needs will be,” says Gordon Hecker, chief marketing officer at the Nationwide’s Nationwide Financial Services Inc. unit.
The fundamental message should be “take care of the basics,” Hecker says. “You ought to eat your broccoli and drink your milk, and it’s the same with retirement planning.”
Some boomer clients will prefer to create one fund to pay for all post-retirement expenses, and others will prefer to create separate pots to pay for different types of expenses, Hecker says.
Today, no U.S. insurer or health maintenance organization plan sells a product that gives affluent boomers who are preparing to retire the ability to pay for all post-retirement out-of-pocket health care costs, or even a few years of out-of-pocket costs, in advance.
For now, products that could help fill planning gaps are variable annuities with lifetime benefits guarantees, long term care insurance and products that come with LTC benefits riders, Hecker says.