MONEY retirement income

New Annuity Options Let You Plan Around Life’s Biggest Unknowns

Longevity annuities can ensure your money lasts a lifetime—and now they can reduce required minimum distributions too.

How much money you will need to save to enjoy a secure retirement depends on the ultimate unknowable: How long will you live?

The possibility of running short is called longevity risk, and the Obama administration last year established rules to foster a new type of annuity, the Qualified Longevity Annuity Contract, that would provide a steady monthly payment until you die.

QLACs are a variation on a broader product category called deferred income annuities, which let buyers pay an initial premium or make a series of scheduled payments and set a future date to start receiving income. Deferred annuities are less expensive to buy than immediate annuities, which start paying out monthly as soon as you purchase them.

You can purchase the plans at or near your retirement age, typically 70, with payouts starting much later, usually at 80 or 85.

The advantage of these QLAC plans is that they provide some guaranteed regular income until death, so they can supplement Social Security. And the deferred feature allows you to generate much more income per dollar invested.

For example, Principal Financial Group Inc, which introduced a QLAC for individual retirement accounts in February, says an $80,000 policy purchased at age 70 will generate $12,840 annually for a man and $11,490 for a woman at age 80. An immediate annuity would provide $6,144 for the 70-year-old man and $5,748 for the woman, according to Immediateannuities.com.

Despite the benefits, annuities have lagged in popularity. The White House thought it could encourage more people to buy deferred annuities if they could be purchased and held inside tax-deferred IRAs and 401(k) plans.

The problem it had to fix was that required minimum distributions mean that 401(k) and IRA participants must start taking withdrawals at age 70 1/2, which conflicts with the later payout dates of longevity annuities.

The new rules state that if a longevity annuity meets certain requirements, the distribution requirement is waived on the contract value (which cannot exceed $125,000 or 25% of the buyer’s account balance, whichever is less).

That not only makes a deferred annuity possible inside a tax-deferred plan, it also can encourage their use for anyone interested in reducing the total amount of savings subject to mandatory distributions.

Sixteen insurance companies are now selling QLAC variations, up from just four in 2012. At Principal Financial, QLACs now account for roughly 10% of all deferred annuities, with the average buyer close to age 70, according to Sara Wiener, assistant vice president of annuities.

Employer sponsors of 401(k) plans are showing more interest in adding income options to their plans, but they have been slow to add annuity options. Still, MetLife Inc is one insurance company testing this market, with a 401(k) product introduced last month.

“If you go back 40 years to the time when defined contribution plans were in their infancy, they were seen as companion savings plans to pensions,” says Roberta Rafaloff, MetLife vice president of institutional income annuities.

“Plan sponsors didn’t think of them as a plan for generating income streams until recently,” she said. “Now they’re taking a much more active interest in retirement income.”

All this still constitutes a small part of a shrinking pie. Sales for all annuity types have been falling in recent years due in part to persistently low interest rates, which determine payouts.

“It’s going to take time for consumers to understand the value of addressing longevity risk,” says Todd Giesing, senior annuity analyst at industry research and consulting group LIMRA. “But we’re hearing from insurance companies that it’s creating a great deal of conversation in the market.”

Read next: Which Generates More Retirement Income—Annuities or Portfolio Withdrawals?

MONEY Social Security

Can You Pass This Retirement Quiz?

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Carl Smith—Getty Images/fStop

If so, you're in the minority of Americans who know the right answers.

Ready for a quick quiz on how Social Security benefits work?

You should ace it. After all, Social Security is the most important retirement benefit for most Americans, and understanding the rules is critical for getting the most out of the program.

So here we go with a few questions:

  1. At what age can you receive your full benefit?
  2. Can you keep working while collecting a full benefit?
  3. If you are divorced, can you collect a benefit based on your ex-spouse’s earning history?
  4. Can you receive a benefit even if you are not a U.S. citizen?

Only 28% of Americans can give enough correct answers to questions like these to get a passing grade, according to a new survey by Massachusetts Mutual Life Insurance Co.

Just one in 1,500 respondents correctly answered all 12 questions, and only 38% got more than half of the answers right.

The findings are disturbing. 90% of Americans over age 65 receive Social Security benefits, and, for 65%, the program provides more than half of total income, according to the National Academy of Social Insurance. For 36%, Social Security is the entire retirement income ballgame.

“We didn’t expect everyone to get a 100% score, but what shocked us was that only 28% got a passing grade,” said Michael R. Fanning, executive vice president of MassMutual’s U.S. Insurance Group.

The silver lining is that the retirement industry has ramped up efforts to educate workers about Social Security. Information and tools about benefits are cropping up in many workplace 401(k) plans, and much media coverage of the program has shifted of late away from political rants to useful information.

So how did you do? Here are the answers:

Full Benefit Age

Most people got this wrong. Some 71% of respondents think 65 is still the full retirement age for Social Security. But it is 66 for today’s retirees and will be 67 for people retiring in 2022.

Only 57% of respondents were aware that the timing of their claim affects the monthly benefit amount.

Working While Receiving Benefits

Slightly more than half missed this one, believing people can continue to work while collecting a full Social Security retirement benefit. But that is true only if you have reached your full retirement age.

This year, an early Social Security filer with income of more than $15,720 from work (employment or self-employment) will pay a penalty. One dollar will be deducted from benefit payments for every $2 earned above that limit.

Collect From an Ex-Spouse

Just 45% think that it is possible to claim a benefit on the record of an ex-spouse. They are correct, and it does not matter if that ex-spouse has remarried.

This can boost benefits dramatically, since spousal and survivor benefits are among the most valuable features of Social Security.

You can claim half of an ex-spouse’s benefit if you are at full retirement age (currently 66), had been married for at least 10 years, and if that benefit works out to be higher than your own. You are entitled to 100 percent of a deceased ex-spouse’s benefit .

Citizenship

Three-quarters of survey respondents think that being an American citizen is necessary to receive Social Security retirement benefits. But the main eligibility requirement to receive benefits is paying into the system.

You must have contributed payroll taxes for a cumulative total of at least 40 quarters (10 years). Along with citizens, individuals who are “lawfully present” in the United States, including permanent residents, refugees and asylum seekers, are eligible for benefits.

Read next: Why Retiring Early May Be More Affordable Than You Think

MONEY

6 Questions to Ask Before Switching to Medicare

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Robert A. Di Ieso, Jr.

Knowing the answers will help you avoid costly mistakes and coverage gaps.

The hand-off from employer health insurance to Medicare can be one of the trickiest challenges you will face in managing your retirement.

The rules are full of pitfalls that can cost you thousands of dollars in unnecessary premiums or lead to a risky gap in coverage.

Here are the six most frequent questions I get about the work-to-Medicare transition:

1. Is the Medicare enrollment process automatic?

A: Only if you have already claimed Social Security benefits by the time you turn 65, which is the Medicare eligibility age.

If not, Medicare requires you to sign up in a seven-month window before and after your 65th birthday, unless you have employer coverage or through your spouse.

Failing to sign up when required is costly. Monthly Part B premiums, which cover doctor visits and medical supplies, jump 10 percent – lifetime – for each full 12-month period that you should have been enrolled. Penalties also are applied for late enrollment in Part D (prescription drugs).

If you retire after 65, you can take advantage of an eight-month special enrollment period that begins the month after employment ends.

2. Should I enroll in Medicare even if I am offered COBRA health insurance when I leave my job?

A: Yes. Although you might need COBRA to cover a spouse or dependent child, Medicare must be your primary insurance coverage once you are over age 65.

“People often miss that memo and find out about the consequences in a nasty way,” says Katy Votava, president of Goodcare.com, which advises consumers on health plan selection.

Besides leading to penalties, missing the special enrollment window could mean going with nothing but COBRA, which provides limited coverage to retirees, until the next enrollment period, which could be a year away.

3. What if I am still working when I turn 65?

A: If your employer has fewer than 20 insurance-eligible workers, Medicare will be your primary coverage, so go ahead and enroll.

You can stick with your employer’s coverage and forestall Medicare enrollment if your employer has 20 or more insurance-eligible workers. The insurance must be similar to Medicare benefits as measured by a set of standards set by the program.

You also could enroll in Medicare, which would provide secondary coverage to fill gaps in your employer’s plan.

One caveat: Do not enroll if you contribute to a Health Savings Account linked to a high-deductible employer plan. You are prohibited from making further contributions to the HSA once enrolled in Medicare.

4. What if I want to execute a file-and-suspend strategy for Social Security? Could I contribute to an HSA in that situation?

A: No. Claiming Social Security benefits automatically triggers enrollment in Medicare Part A, which covers hospital and nursing home stays. That would still be true if you file and suspend your benefits while still working and participating in a high-deductible employer health insurance plan.

5. Do I sign up for Medicare when I retire if my former employer provides a retiree health benefit?

A: Even if your former employer offers a retiree health benefit, it is important to sign up for Medicare at age 65 to avoid penalties and coverage gaps. Employer-provided benefits usually provide a secondary layer of coverage – often covering co-pays or providing a drug benefit.

The key to coordinating the two insurance plans: “Understand who pays first,” says Votava.

But Votava says retirees should compare the cost of retiree coverage with what is available on the open Medicare market. “I often see people holding on to retiree coverage when it’s not the best value for them.”

This is especially true for with supplemental plans that cap out-of-pocket costs, either Medigap or Medicare Advantage. “I’ve had clients find much less expensive Medigap or Medicare Advantage policies with equal or better coverage,” Votava says.

6. What if I retire, enroll in Medicare and then go back into a full-time job?

A: If your new employer provides health insurance, you can drop Medicare and re-enroll when you finally retire without paying late enrollment penalties.

Call the Social Security Administration (1-800-772-1213), which will send a form to sign that creates a record of what you are doing. The paper trail is important because it helps you avoid late enrollment penalties when you return to Medicare.

MONEY Opinion

How to Use Social Security to Fix Retirement Inequality

Social Security's retirement and disability trust funds are expected to run out in 2033.

Americans need bigger retirement nest eggs, there is no doubt about that. More than half of us have saved less than $25,000, according to the Employee Benefit Research Institute.

Policy experts often point to such figures to underscore the looming retirement security crisis, and proposals have been flying this year from Republicans and Democrats alike for ways to encourage people to sock away more money.

Just one problem: Middle- and lower-income households often do not earn enough to save meaningful amounts due to decades of stagnant wage growth, job insecurity and the rising costs of housing and healthcare.

Only high-income households have managed to build significant savings, and the Center for Retirement Research at Boston College says 52 percent of today’s working-age households face the shock of declining living standards in retirement.

In other words, income inequality is translating into retirement inequality.

Here is a better option: Expand Social Security benefits to help people who need it most.

“If you have a dollar to spend on retirement security, it’s much better to spend it on Social Security than by spreading it out along tax brackets to incent retirement savings,” says Ben Vegthe, research director of the Social Security Works advocacy group.

Vegthe makes the case for using Social Security to address retirement inequality in a persuasive research paper set for publication in the June issue of the journal Poverty and Public Policy. He recommends expanding benefits and funding the cost primarily by scrapping the cap on wages subject to payroll taxes ($118,500 this year).

He would also add a 6.2 percent tax on investment income (equivalent to the current individual payroll tax rate) and restore the estate tax to where it was in 2000. At that time, estates worth $1 million were exempted (compared with $5.4 million this year), and the top marginal tax rate was 55 percent (compared with 40 percent this year).

Those changes would eliminate the funding shortfall now facing Social Security. The combined retirement and disability trust funds are projected to run out in 2033, when retirement benefits would have to be cut by 25 percent across the board.

Vegthe estimates that one-third of the shortfall is due to slow and unequal wage growth in the economy.

By law, Social Security taxes should be levied on 90 percent of the country’s wage base, and that was the case in 1984 after the last round of major reforms were enacted. But today, 17.5 percent of taxable earnings fall above the maximum, according to Social Security Administration data.

Equally important, the tax hikes could also fund expansion. What would that look like? Now-retired Iowa Senator Tom Harkin, a Democrat, last year proposed boosting benefits across the board by about $72 per month, and his proposal is expected to be introduced in the Senate again this year. Social Security Works has called for a 10 percent across-the-board raise, up to a maximum increase of $150 per month.

Either of those plans would primarily help lower- and middle-income workers because the Social Security benefit formula already replaces a larger share of earnings for those households than for high earners. The Harkin plan would give an extra boost to benefits for the lowest-income group.

Some lawmakers are actually aiming to cut Social Security benefits as part of a broader deal to rescue the program’s ailing disability insurance fund. But others are focused on encouraging saving, and some useful ideas have been proposed.

Representative Joe Crowley, a Democrat from New York, has proposed a Roth-style retirement saving account that every child would receive at birth, seeded with a $500 government contribution, and expanded child tax credits for additional contributions by parents.

Republican Senator Orrin Hatch from Utah has proposed a Starter 401(k) for small businesses that would allow employees under age 50 to save up to $8,000, much more than the $5,000 limit on individual retirement accounts.

Senators Susan Collins, a Republican from Maine, and Bill Nelson, a Democrat from Florida, have introduced legislation that would make it easier for smaller businesses to cut administrative costs by forming multiple-employer 401(k)-style plans.

But ideas like these would probably benefit mainly upper-income people.

An analysis of Federal Reserve data by the Center for Retirement Research found that in 2013, pre-retirement households (age 55-64) with annual income below $39,000 had median total retirement savings of $13,000 in 401(k) and IRA accounts; middle-class households (income from $61,000 to $100,000) had median savings of $100,000. Only in the highest-income band ($138,000 or more) were accumulations significant at a median of $452,000.

Perhaps there is a bipartisan deal to be had: Expand savings options and Social Security at the same time.

I am convinced Social Security expansion offers the best path to addressing the retirement crisis, but why not try both approaches and find out which delivers the goods?

MONEY Longevity

Why Only the Super-Rich Will Live to 150

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Jana Leon—Getty Images

Only the 1 percenters will be able to afford the cutting-edge healthcare that will meaningfully extend lifespans, according to a leading expert on longevity.

Could the one percent soon get to live twice as long as the rest of us—maybe even forever?

Immortality may not be in the cards just yet, but exponential breakthroughs in technology and medicine will make possible lifespans of 150 years or more, according to Ken Dychtwald.

Dychtwald, a pioneering expert on gerontology, longevity and how the baby boomer wave will impact society, says dramatically longer lifespans will not necessarily translate into healthier years, and the longevity gains will not be experienced by everyone.

Instead, we are headed toward a one percent phenomenon, with only the very wealthy able to afford the cutting edge healthcare that adds meaningfully to life.

Uneven gains in longevity are nothing new. American men live an average of two years longer than they did in 2000, and women have an additional 2.4 years, according to mortality projections released last year by the Society of Actuaries.

Along with the gender gap, higher-income white-collar workers outlive blue-collar workers by 2.5 years, on average, from age 65. Other research points to a sizable longevity gap by educational attainment and race.

Lifespan tells only part of the story, though.

“We also have people dying longer,” says Dychtwald. “We are able to keep people alive without much quality of life in many cases. We haven’t done a great job of making healthspan match up with lifespan, which is both miserable and unbelievably costly—and frightening.”

The biggest healthspan concern is Alzheimer’s, which strikes at a 47% rate among the over 85 population.

“If we just keep living longer, but we don’t knock out this horrible disease, it will be the sinkhole of the century,” Dychtwald says. “It will take us down – every country. It will be a horror beyond horrors. And how much do we spend for research on this disease? Hardly anything.”

Other debilitating diseases that decrease healthspan include obesity, heart attacks, strokes, cancer and diabetes.

Substantial attempts to extend healthspan through more emphasis on fitness and prevention are coinciding with breakthroughs in pharmaceuticals, stem cell therapies and genetic manipulation.

Dychtwald points to the entry of a new breed of Silicon Valley entrepreneurs with big resources at their disposal.

“The talent migrating into the field is like nothing I’ve seen in my 40 years in the field, and they’re convinced there is nothing you can’t do if you can turn biotechnology into information technology,” he says.

LONGEVITY INC

Craig Venter, one of the first scientists to sequence the human genome, launched a company last year called Human Longevity Inc that plans to apply genetic sequencing to some of the most challenging issues involving aging.

Calico, a company focused on extending lifespans, was launched by Google Inc in 2013. There is also big money chasing longevity from the Facebook, eBay, and Napster fortunes.

A recent headline in The Week magazine summed it up well: “How Silicon Valley’s billionaires are trying to defy death.”

The new research money is largely private and unregulated. The big breakthroughs will be very expensive and available only to the very wealthy, at least initially.

“There will be breakthroughs in the next 15 or 20 years that will have to do with aging itself—actually stopping the biological clock,” says Dychtwald. “And I think that really rich people are going to get access to it, people who are willing to spend almost unlimited sums of money. Imagine a time when ten thousand really rich people get to live forever, or not have to get dementia.”

Those remarkable medical advances will become more widely available and affordable over time, Dychtwald says.

“But in the meantime, there will be a whole lot of people ailing and suffering,” he warns.

MONEY Best Places

See How Your Neighborhood Ranks As a Place to Age

Powell & Mason Cablecar Line, Taylor Street, Fishermans Wharf, San Francisco
David Wall—Alamy Fisherman's Wharf, San Francisco

Use this tool to see how livable your town or city is for retirees.

Should you stay or should you go? That will be a key question in an aging America, as people try to decide if their homes and communities still work for them as they grow old.

A new online tool from AARP can help with answers. The free Livability Index grades every neighborhood and city in the United States on a zero-to-100 scale as a place to live when you are getting older.

There is no shortage of lists and rankings of places to live in retirement. Many are superficial, measuring factors such as sunshine, low tax rates or the number of golf courses. More thoughtful studies reframe the question to consider quality-of-life issues that affect everyone—affordability, health care, public safety, public transportation, education and culture (See Reuters’ version at reut.rs/13Bcl4h).

The new AARP tool adds value by making it possible to score any neighborhood and community in the country – and drill down into the details. Just plug in an address to see how a location scores for seven key attributes: housing, neighborhood, transportation, environment, health, civic engagement and opportunity.

Overall, the highest-ranking large city is San Francisco with a score of 66 and rose to the top due to its availability and cost of public transportation, walkability and overall levels of health. The top medium city is Madison, Wisconsin (68) and the top small town is La Crosse, Wisconsin (70).

It is telling that even the top-ranked locations get just mediocre scores. “The numbers are telling us that no community is perfect – and most are far from perfect,” says Rodney Harrell, director of livable communities at the AARP Public Policy Institute. “The goal here is to provide a tool that helps people make their communities better.”

The timing is right for discussions to get under way about making communities better places to age. The number of households headed by someone age 70 or older will surge 42% by 2025, according to the Joint Center for Housing Studies of Harvard University. Most of those households will be aging in place, not downsizing or moving to retirement communities.

What exactly is aging in place? The Centers for Disease Control and Prevention defines it as “the ability to live in one’s own home and community safely, independently, and comfortably, regardless of age, income or ability level.”

Of course, that definition does not oblige you to age in your current place. The smart move is to assess your current location – and make a move if necessary.

That is the plan recommended by gerontologist Stephen M. Golant in his new book Aging in the Right Place (Health Professions Press, February 2015).

He challenges the orthodoxy about aging in place, explaining why it is not always realistic to stay where you are. In particular, he makes the case that a home must get a cold-eyed assessment as a financial asset, with an eye toward the cost of living in it (mortgage, taxes, and insurance) and any possible repairs or remodeling that might be needed to adapt the home as you age.

But that can be a tall order, considering the emotional ties to place that we all develop.

“It’s one of the biggest issues people face, and they don’t have a lot of information about these issues,” Harrell says. “People do build emotional ties to friends and community, but they also need information to help them make sound choices.”

MONEY Social Security

This Little-Known Pension Rule May Slash Your Social Security Benefit

teacher in lecture hall
Gallery Stock

If you are covered by a public sector pension, you may not get the Social Security payout you're expecting.

Some U.S. workers who have paid into the Social Security system are in for a rude awakening when the checks start coming: Their benefits could be chopped up to $413 per month.

That is the maximum potential cut for 2015 stemming from the Windfall Elimination Provision (WEP), a little-understood rule that was signed into law in 1983 to prevent double-dipping from both Social Security and public sector pensions. A sister rule called the Government Pension Offset (GPO) can result in even sharper cuts to spousal and survivor benefits.

WEP affected about 1.5 million Social Security beneficiaries in 2012, and another 568,000 were hit by the GPO, according to the U.S. Social Security Administration (SSA). Most of those affected are teachers and employees of state and local government.

These two safeguards often come as big news to retirees. Until 2005, no law required that affected employees be informed by their employers. Even now, the law only requires employers to inform new workers of the possible impact on Social Security benefits earned in other jobs.

The Social Security Administration’s statement of benefits has included a generic description of the possible impact of WEP and GPO since 2007; for workers who are affected, the statement includes a link is included to an online tool where the impact on the individual can be calculated. People who have worked only in jobs not covered by Social Security get a letter indicating that they are not eligible.

Many retirees perceive the two rules as grossly unfair. Opponents have been pushing for repeal, so far to no effect.

Why WEP?

To understand the issue, you need to understand how Social Security benefits are distributed across the wealth spectrum of wage-earners.

The program uses a progressive formula that aims to return the highest amount to the lowest-earning workers—the same idea that drives our system of income tax brackets.

It is a complex formula, but here is the upshot: Without the WEP, a worker who had just 20 years of employment covered by Social Security, rather than 30, would be in position to get a much higher return because of those brackets.

Where is the double dip? The years in a job covered by a pension instead of Social Security.

“If you had worked in non-covered employment for a significant portion of your career, there should be a shared burden between the pension you receive from that period of your employment and from Social Security in providing your benefit,” says SSA Chief Actuary Stephen C. Goss. “Just because a person worked only a portion of their career with Social Security-covered employment, they should not be benefiting by getting a higher rate of return.”

If you are already receiving a qualifying pension when you file for Social Security, then the WEP formula kicks in immediately. The SSA asks a question about non-covered pensions when you file for benefits, and it also has access to the Internal Revenue Service Form 1099-R, which shows income from pensions and other retirement income.

If your pension payments start after you file, the adjustment will occur then.

If you have 30 years of Social Security-covered employment, no WEP is applied. From 30 to 20 years, a sliding WEP scale is applied. Below 20 years, your benefit would drop even more. (For more information, click here.)

How does this affect your checks? The SSA offers this example: A person whose annual Social Security statement projects a $1,400 monthly benefit could get just $1,000, due to the WEP.

Your maximum loss is set at 50% of whatever you receive from your separate pension, so if that is relatively small, the WEP effect will be minimal.

You can still earn credits for delayed filing, and you will still get Social Security’s annual cost-of-living adjustment for inflation, but the WEP will still affect your initial benefit.

The WEP formula also affects spousal and dependent benefits during your lifetime. However, if your spouse receives a survivor benefit after your death, it is reset to the original amount.

Can you do anything to avoid getting whacked by WEP? Working longer in a Social Security-covered job before retiring might help. Remember, you are immune to the provision if you have 30 years of what Social Security defines as “substantial earnings” in covered work. That amounts to $22,050 for 2015.

So if you have 25 years, try to work another five, says Jim Blankenship, a financial planner who specializes in Social Security benefits. “That’s money in your pocket.”

Read next: The Pitfalls of Claiming Social Security in a Common-Law Marriage

Update: This story was updated to reflect that Social Security Administration gives little advance warning to beneficiaries, instead of no advance warning, and a description of Social Security benefits statements was added.

MONEY retirement income

Why Are States Leaving Billions in Retiree Income on the Table?

Many elderly can afford to pay more in taxes. And with a growing number of needy seniors to support, states can't afford to pass up that revenue.

Illinois is the national poster child for state budget messes. My home state faces a $7.4 billion general fund deficit and a $12 billion revenue shortfall. One proposed idea for plugging at least part of the horrific shortfall: tax retirement income. But our new governor, Republican Bruce Rauner, has rejected the idea.

Illinois exempts all retirement income from state taxes—Social Security, private and public pensions, and annuities. We’re leaving $2 billion on the table annually, according to the state’s estimates. And we’re hardly alone: 36 states that have an income tax allow some exemption for private or public pension benefits, and 32 exempt all Social Security benefits from tax, according to the Institute on Taxation and Economic Policy (ITEP). States currently considering wider income tax exemptions for seniors include Rhode Island and Maryland.

With the April 15 tax day just around the corner, it’s a timely moment to ask: What are these politicians thinking?

Income tax exemptions date back to a time when elderly poverty rates were much higher than they are today (federal taxation of Social Security began in the 1980s). As recently as 1970, almost 25% of Americans older than 65 lived in poverty, according to the Census Bureau; now it’s around 9%. Today, it still makes sense to tread lightly on vulnerable lower-income seniors, many of whom live hand to mouth trying to meet basic expenses. And the number of vulnerable seniors is on the rise.

MORE SENIORS

But much of the benefit of state retirement income exemptions goes to affluent elderly households. The cost of these exemptions is high, and it’s going to get higher as our population ages. In llinois, the number of senior citizens is projected to grow from 1.7 million in 2010 to 2.7 million by 2030. That points to a demographic shift that will mean a shrinking pool of workers will be funding tax breaks for a growing group of retirees.

So there’s a real need for states to target these tax breaks to seniors who really need them. Yet one of the plans floated in Rhode Island would exempt all state, local and federal retirement income, including Social Security benefits—from the state’s personal income tax. The Social Security proposal is an especially good example of a poorly targeted break.

Currently, Rhode Island uses the federal formula for taxing Social Security, which already protects low-income seniors from taxes. Under the federal formula, beneficiaries with income lower than $25,000 ($32,000 for couples) are exempt from any tax (income here is defined as adjusted gross plus half of your Social Security benefit). Up to 50% of benefits are taxed for beneficiaries with income from $25,000 to $34,000 ($32,000 to $44,000 for married couples). For seniors with incomes above those levels, up to 85% of benefits are taxed.

If Rhode Island decides to exempt all Social Security income from taxation, more than half of the benefit will flow to the wealthiest 20 percent of taxpayers, according to an ITEP analysis.

“The poorest seniors in Rhode Island wouldn’t get a dime from this change, because they already don’t pay state taxes on Social Security,” says Meg Wiehe, ITEP’s state tax policy director.

WORKING LONGER

Another tax fairness issue is inequitable treatment of older workers and retirees. The percentage of older workers staying in the labor force beyond traditional retirement age is rising—and many of them are sticking around just to make ends meet. Those workers are bearing the full state income tax burden, effectively subsidizing more affluent retired counterparts.

Some tax-cut advocates might argue that breaks for seniors will help retain or attract residents to their states. But numerous studies show that few seniors move around the country for any reason at all. Just 50% of Americans age 50 to 64 say they hope to retire in a different location, according to a recent survey by Bankrate.com, and the rate drops to 20% for people over 65.

For those who do move, taxes are a consideration—but not the only one.

“A lot of factors go into the decision,” says Rocky Mengle, senior state analyst at Wolters Kluwer, Tax & Accounting US. “Climate, proximity to family and friends are all very important, along with the overall cost of living. But I’d certainly throw taxes into the mix as a consideration.”

Smart tax policy makers and politicians should take all these factors into consideration—especially in states that are facing crushing deficits and debt burdens. Targeted exemptions for vulnerable seniors make sense, but the breaks should be affluence-tested.

“The scales would vary state to state,” says Wiehe. “But a test that makes sure taxation isn’t a blanket giveaway with most of it going to the most affluent households.”

Indeed. In the golden years, not all the gold needs to go to the rich.

Read next: 1 in 3 Older Workers Likely to Be Poor, or Near Poor, in Retirement

MONEY Health Care

Proposed Medicare ‘Doc Fix’ Comes at a Cost to Seniors

A measure designed to head off big cuts in payments to doctors asks Medicare recipients to foot part of the bill.

Congress is headed toward a bipartisan solution to fix a Medicare formula that threatens to slash payments to doctors every year. The so-called “doc fix” would replace the cuts with a multipronged approach that will be expensive and will have Medicare beneficiaries pay part of the bill.

Congress has repeatedly overridden the payment cuts, which are mandated under a formula called the Sustainable Growth Rate (SGR), which became law in 1997, that is a way of keeping growth in physician payments in line with the economy’s overall growth. This year, unless Congress acts, rates will automatically be slashed 21 percent.

In a rare instance of bipartisan collaboration, House Speaker John Boehner and Minority Leader Nancy Pelosi are pushing a plan to replace the SGR with a new formula that rewards physicians who meet certain government standards for providing high quality, cost-effective care. If they can get the plan through Congress, President Barack Obama has said he will sign it.

The fix will cost an estimated $200 billion over 10 years. Although Congress has not figured out how to pay the full tab, $70 billion will come from the pocketbooks of seniors.

There are better places to go for the money, such as allowing Medicare to negotiate drug prices with pharmaceutical companies and tightening up reimbursements to Medicare Advantage plans. But there’s no political will in Congress for that approach.

And the doc fix needs to be done. Eliminating the SGR will greatly reduce the risk that physicians will get fed up with the ongoing threat of reduced payments and stop accepting Medicare patients. “Access to physicians hasn’t been a big problem, but if doctors received a 21 percent cut in fees, that might change the picture,” says Tricia Neuman, senior vice president and director of the Program on Medicare Policy at the Kaiser Family Foundation.

Here’s what the plan would cost seniors:

Medigap reform

Many Medicare enrollees buy private Medigap policies that supplement their government-funded coverage (average annual cost: $2,166, according to Kaiser). The policies typically cover the deductible in Part B (outpatient services), which is $147 this year, and put a cap on out-of-pocket hospitalization costs.

Under the bipartisan plan, Medigap plans would no longer cover the annual Part B deductible for new enrollees, starting in 2020, so seniors would have to pay it themselves. Current Medigap policyholders and new enrollees up to 2020 would be protected.

The goal would be to make seniors put more “skin in the game,” which conservatives have long argued would lower costs by making patients think twice about using medical services if they know they must pay something for all services they use.

Plenty of research confirms that higher out-of-pocket expense will reduce utilization, but that doesn’t mean the reform will actually save money for Medicare.

Numerous studies show that exposure to higher out-of-pocket costs results in people using fewer services, Neuman says. If seniors forgo care because of the deductible, Medicare would achieve some savings. “The hope is people will be more sensitive to costs and go without unnecessary care,” she says. “But if instead, some forgo medical care that they need, they may require expensive care down the road, potentially raising costs for Medicare over time.”

High-income premium surcharges

Affluent enrollees already pay more for Medicare. Individuals with modified adjusted gross income (MAGI) starting at $85,000 ($170,000 for joint filers) pay a higher share of the government’s full cost of coverage in Medicare Part B and Part D for prescription drug coverage. This year, for example, seniors with incomes at or below $85,0000 pay $104.90 per month in Part B premiums, but higher income seniors pay between $146.90 and $335.70, depending on their income.

The new plan will shift a higher percentage of costs to higher-income seniors starting in 2018 for those with MAGI between $133,500 and $214,000 (twice that for couples). Seniors with income of $133,000 to $160,000 would pay 65 percent of total premium costs, rather than 50 percent today. Seniors with incomes between $160,000 and $214,000 would pay 80 percent rather than 65 percent, as they do today.

Everyone pays more for Part B

Under current law, enrollee premiums are set to cover 25 percent of Medicare Part B spending, so some of the doc fix’s increased costs will be allocated to them automatically. Neuman says a freeze in physician fees is already baked into the monthly Part B premium for this year, so she expects the doc fix to result in a relatively modest increase in premiums for next year, although it’s difficult to say how much because so many other factors drive the numbers.

MONEY Pensions

Here’s a New Reason to Think Twice About Trading In Your Pension

More workers are being offered lump-sum pension buyouts. But the information packets they receive leave out crucial details, a GAO study finds.

If you are due a pension from a former employer, there is a good chance you were or soon will be offered a lump-sum payment in exchange for giving up that guaranteed monthly check for life.

Should you take it? Probably not, but making a smart decision depends on a complex set of assumptions about future interest rates, possible rates of market returns and your longevity. It is a tough analysis unless you have an actuarial background.

Unfortunately, employers are not providing enough information.

That is the conclusion of a recent review by the U.S. Government Accountability Office of 11 lump-sum-offer information packets provided to beneficiaries by pension plan sponsors.

The key failings included unclear comparisons of the lump sum’s value compared with the value of lifetime pension payouts. Also lacking were many of the explanations of mortality factors and interest rates used to calculate the lump sums.

Even more worrisome was missing information about the insurance guarantees that probably would be available to participants from the Pension Benefit Guarantee Corp in the event of a sponsor default.

That is a major problem because fear of pension failure is one of the biggest factors driving participants to accept lump-sum offers. Having PBGC insurance is like having your bank deposits guaranteed by the Federal Deposit Insurance Corp; if a plan fails, most workers receive 100% of the benefits they have earned up to that point.

The GAO did find that the packets were in compliance with the Internal Revenue Service rules on disclosures to employees. However, it urged the U.S. Department of Labor to tighten reporting requirements on lump-sum offers and to work with other federal agencies to clarify the guidance sponsors should be providing.

Better information certainly would be helpful to beneficiaries as the lump-sum trend continues to grow.

Private sector pension plans are trying to lower their risk that recipients will live longer and therefore collect more than the actuaries originally planned.

Twenty-two percent of sponsors say they are “very likely” to make lump-sum offers to former, vested workers this year, up from 14% in 2014, according to a study by Aon Hewitt, the employee benefit consulting firm.

But better information alone is not likely to lead to better decisions,” says Norman Stein, a law professor at Drexel University and an expert on pension law.

Beneficiaries often make up their minds based on emotional factors like fear of a pension plan default or the appeal of getting a large pile of cash up front, says Steve Vernon, an actuary and consulting research scholar at the Stanford Center on Longevity.

In most cases, beneficiaries will come out ahead by sticking with a monthly check from a pension, but you should evaluate the lump-sum offer against such factors as your likely life expectancy and other sources of guaranteed income (Social Security or a spouse’s pension).

Some beneficiaries accept lump sums expecting to get better returns by investing the proceeds. But an apples-to-apples comparison requires measuring the rate of return used to calculate your lump sum against risk-free investments like certificates of deposit or Treasuries. After all, most private-sector pensions are a guaranteed income source backed by the U.S. government.

You could also take the lump sum and buy an annuity, but these commercial products typically will generate 10% to 30% less income than your pension, Vernon says.

“A good measure of the lump sum offer is to calculate how much it would cost you to buy that annuity from an insurance company,” he says.

You can get an estimate of a lump-sum conversion at ImmediateAnnuities.com. Vanguard offers an annuity marketplace for its customers.

But Vernon has a more basic way to think about a lump-sum decision.

“Just the fact that employers call this ‘pension risk transfer’ should give you pause,” he says. “These big corporations want to transfer mortality and interest risk to you because they don’t want it.

“Ask yourself: ‘Why should I take something my employer doesn’t want?'”

Read next: Here’s How to Tell If You’re Saving Enough for Retirement

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