MONEY Aging

Why Most Seniors Can’t Afford to Pay More for Medicare

Replacing Medicare with vouchers would push costs higher and put older Americans at risk.

Should seniors pay more for Medicare? Republicans think so; they have repeatedly called for replacing the current program with vouchers that would shift cost and risk to seniors.

There’s no doubt this is where Republicans will take us if they capture control of Congress this year, and the White House in 2016. Representative Paul Ryan, the Wisconsin Republican who chairs the House Budget Committee, advocates “premium support” reforms that would give seniors vouchers to buy private Medicare insurance policies in lieu of traditional fee-for-service Medicare.

Under the latest version of Ryan’s budget proposed in April, starting in 2024 seniors could opt to buy premium-supported private plans or stay in traditional Medicare. Ryan has argued that introducing competition will bring down costs over time, and capping the government’s costs does sound like a tempting way to address Medicare’s financial problems.

Medicare’s trustees project total annual spending will jump 78% by 2022, to $1.09 trillion. Much of that increase will be fueled by higher enrollment as the baby boom generation ages.

But premium supports would shift risk to seniors, and could effectively make traditional Medicare much more expensive by siphoning off healthier seniors to private plans. The Congressional Budget Office has estimated that this effect could boost traditional Medicare premiums 50% by 2020 compared with current projections.

Most seniors simply can’t afford to pay more. If you doubt it, check out the new interactive tool launched last month by the Henry J. Kaiser Family Foundation, one of the country’s leading healthcare research groups.

The tool analyzes the income and assets of today’s 52.4 million Medicare beneficiaries, and how their financial picture will change between now and 2030, when 80.9 million people will be covered by the program. It can compare different demographic slices of the Medicare population based on variables such as education, race, gender and marital status—and here you get a stark look at how economic inequality affects the pocketbooks of seniors.

Kaiser’s tool is based on a simulation model developed by the Urban Institute that uses population data to analyze the long-range impact on retirement and aging issues. I encourage you to test-drive the tool, but here are some highlights:

INCOME

Fifty-three percent of Medicare beneficiaries had $25,000 or less in annual income last year; half had savings below $61,400 and less than $67,700 in home equity on a per-person basis.

The income figures reflect the sharp divisions that characterize the wider U.S. population. Just 4% of seniors had income over $100,000 last year; 27% had income below $15,000 (which is just a bit higher than the average annual Social Security benefit).

Healthcare already is one of the largest expenses for seniors, most of whom are on fixed incomes. HealthView Services, which develops software for gauging healthcare costs, recently estimated that a senior retiring this year in high-cost Massachusetts would pay $7,020 in Medicare premiums alone—a number that will jump to $11,536 in 2024. And that figure doesn’t include co-pays and out-of-pocket costs for things Medicare doesn’t cover, such as dental care. It also doesn’t include costs for a catastrophic event.

“Sixty-six thousand in savings is less than the cost of one year in a nursing home,” says Tricia Neuman, senior vice-president at the foundation and director of the foundation’s Medicare policy program. “That tells us that many people on Medicare today don’t have the resources they’d need to pay for a significant health or long-term-care expense if it should arise.”

DEMOGRAPHIC DIVIDES

Neuman says she was especially surprised by the extent of the gaps in income and saving by race, ethnicity and gender. Median 2013 per capita income for white Medicare beneficiaries was $26,400, compared with $16,350 for African Americans and $13,000 for Hispanics.

Men had $25,880 in median income, compared with $21,800 for women. And married couples were better off than singles: Per capita income for married seniors in 2013 was $27,400, compared with $20,250 for divorced people, $21,050 for widows and $14,150 for those who never married.

That’s unlikely to change by 2030. “The model suggests there won’t be phenomenal changes in wealth, or that seniors will be that much more comfortable,” Neuman says.

Neuman says the data also points to continued income inequality and sharp divisions in the status of seniors. In 2030, 5% of Medicare beneficiaries will have income over $111,900, while half will have income below $28,250.

“There will always be a small share of the Medicare population with sufficient wealth and resources to absorb higher costs, but most will not be in that position,” she says. “The assumption that boomers are healthier and wealthier and that we’ll have a much rosier Medicare outlook down the road just isn’t going to happen.”

MONEY Health Care

The State of Senior Health Depends on Your State

Dollars and cents
Finnbarr Webster / Alamy

Reports on senior health reveal a north-south divide. Many worst-ranking states rejected Medicaid expansion.

What are the best and worst places to stay healthy as you age? For answers, take out a map and follow the Mississippi River from north to south. The healthiest people over 65 are in Minnesota, the sickest in Mississippi.

That’s among the findings of the America’s Health Rankings Senior Report released in May by the United Health Foundation. The report ranks the 50 states by assessing data covering individual behavior, the environment and communities where seniors live, local health policy and clinical care.

Minnesota took top honors for the second year in a row, ranking high for everything from the rate of annual dental visits, volunteerism, high percentage of quality nursing-home beds and low percentage of food insecurity. This year’s runners-up are Hawaii, New Hampshire, Vermont and Massachusetts. (See how your state fared here.).

The researchers base their rankings on 34 measures of health. But here’s one you won’t find in the report: state compliance with the Affordable Care Act (ACA). While the health reform law isn’t mainly about seniors, it has one important feature that can boost the health of lower-income older people: the expansion of Medicaid.

The ACA aims to expand health insurance coverage for low-income Americans through broadened Medicaid eligibility, with the federal government picking up 100% of the tab for the first three years (2014-2016) and no less than 90% after that. But when the U.S. Supreme Court affirmed the ACA’s legality in 2012, it made the Medicaid expansion optional, and 21 states have rejected the expansion for ideological or fiscal reasons.

And guess what: Most of the states with the worst senior health report cards also rejected the Medicaid expansion.

Nearly all Americans over age 65 are covered by Medicare. But the Medicaid expansion also is a key lever for improving senior health because it extends coverage to older people who haven’t yet become eligible for Medicare. That means otherwise uninsured low-income seniors are able to get medical care in the years leading up to age 65—and they are healthier when they arrive at Medicare’s doorstep.

Two studies from non-partisan reports verify this. The U.S. Government Accountability Office reported late last year that seniors who had continuous health insurance coverage in the six years before enrolling in Medicare used fewer and less costly medical services during their first six years in the program; in their first year of Medicare enrollment, they had 35% lower average total spending.

The GAO study confirmed the findings of a 2009 study report by two researchers at the Harvard Medical School. That study looked at individuals who were continuously or intermittently uninsured between age 51 and 64; these patients cost Medicare an additional $1,000 per person due mainly to complications from cardiovascular disease, diabetes and delayed surgeries for arthritis.

Fifty-two percent of Medicaid-rejecting states ranked in the study’s bottom third for senior health, including two very large states, Texas and Florida. Many of these states also can be found in a list of states with the highest rates of poverty among people over 65.

What emerges is a north-south divide on senior health. “Many states that haven’t expanded Medicaid are in the South, and there’s a clear link between socioeconomic status and health status,” says Tricia Neuman, senior vice-president at the Henry J Kaiser Family Foundation and director of the foundation’s Medicare policy program. “Insurance may not be the only answer, but it certainly is helpful.”

The United Health Foundation—a non-profit funded by the insurer UnitedHealth Groupdidn’t consider insurance coverage in its study, but it did consider poverty. Minnesota’s rate was 5.4%—well below the 9.3% national rate. Mississippi ranked dead last, with a 13.5% poverty rate.

In states that rejected the Medicaid expansion, we are witnessing a victory of politics over compassion and morality. Jonathan Gruber, an economics professor at the Massachusetts Institute of Technology and a key architect of health reform in Massachusetts and under the ACA, summed it up in an interview with HealthInsurance.org earlier this year, saying that these states “are willing to sacrifice billions of dollars of injections into their economy in order to punish poor people. It really is just almost awesome in its evilness.”

MONEY long term care

The Retirement Crisis Nobody Talks About: Long-term Care

If you become disabled, you may face huge bills for daily help. And, no, Medicare doesn't cover it.

When you try to gauge the biggest risks to your financial security in retirement, health care costs usually top the list. But there’s even bigger danger that doesn’t get as much attention: long-term care costs.

By whatever measure you use, many Americans aren’t saving enough for retirement. In its latest annual retirement readiness study, the Employee Benefit Research Institute found that some 57% to 59% of Baby Boomer and Gen X households are on track to retire comfortably. But if you factor in long-term care costs, the percentage of households running short of money in retirement soars by 100% or more after 20 years for those in middle-class or upper-income quartiles, according to new study by EBRI. The analysis assumes that Baby Boomer and Gen X households will retire at 65 and spend average amounts for food, housing and other living expenses, in addition to long-term care costs.

The risk of falling short financially is highest for those in the lower-income quartile—by the 10th year of retirement, some 70% in this group would have run short of money, according to EBRI, though the majority were already headed for trouble because of lack of savings. But even households in the highest-income quartile saw the percentage falling short reach 8% by the 20th year of retirement vs. just 1% without accounting for long-term care.

If you become disabled, the costs of assistance with daily living tasks (what’s commonly referred to as long-term care) aren’t generally covered by Medicare. That’s something many people don’t realize. A nursing home in the Midwest might run you $60,000 a year, while the median salary for a home health aide may be $45,000 annually. Some 70% of Americans age 65 and older are expected to need long-term care at some point in their lives. And studies have found that many families end up paying huge amounts out of pocket, as much as $100,000 in the last five years of life.

Planning ahead can help, but unfortunately there are few solutions to the long-term care dilemma. One alternative is to purchase long-term care insurance, but it’s pricey, so few can afford it. “Long-term care insurance is something that nobody wants to buy and the insurance industry doesn’t want to sell,” says Howard Gleckman, senior fellow at the Urban Institute and author of “Caring for Our Parents.” In recent years, many insurance companies have raised premiums on long-term care policies. And other insurers have gotten out of the business—that’s mainly because fewer buyers than expected are dropping policies, and low interest rates have reduced profits.

Another option is Medicaid, which many seniors end up relying on to pay for long-term care. But in order to qualify you will have to spend down most of your assets—not anyone’s idea of a dream retirement. And as more aging Boomers and Gen X retirees require care, Medicaid programs will come under increasing financial pressure, Gleckman says, so it’s not clear what the programs will provide in 20 years.

Until more options develop—perhaps some kind of private-public partnership for long-term care—your best strategy is to stay healthy, save as much as you can, and build a community network. People with strong social ties, research shows, live longer, happier lives.

This article was updated to clarify the percentage of households facing shortfalls in retirement due to long-term care costs.

MONEY Health Care

The Retirement Decision That Could Cost You $51,000

An early retirement may be good for reducing stress but it will also shrink your nest egg.

If you’re worried that health care costs will take a big bite out of your retirement income, don’t retire early.

Couples retiring at age 65 will spend an average $220,000 on health care expenditures, according to the 2014 Retiree Health Care Cost Estimate by Fidelity Investments.

But if you leave the job before 65, you’ll face even higher costs. A couple retiring at 62 would pay $17,000 a year in insurance premiums and out-of-pocket expenses—a total of $51,000—before reaching Medicare eligibility at 65, Fidelity calculated. That would push your total retirement health care costs to $271,000.

“If you have to buy health insurance when you’re older and you’re not on Medicare yet, it’s going to be a lot more expensive,” says Carolyn McClanahan, a doctor and a certified financial planner in Jacksonville, Florida. Even under the Affordable Care Act, older people spend $500 to $1,000 more a month than younger people do in premiums, she points out.

All the more reason to delay your retirement as long as you can. If you wait till age 67, you could save $10,000 a year on your medical expenses. That’s assuming you stay employed and your company pays the majority of your health care costs, which allows you to delay taking Medicare. “On average, Medicare picks up much less than the typical employer plan,” says Sunit Patel, senior vice president of Fidelity Benefits Consulting.

There is some good news in Fidelity’s latest analysis. Health care expenses have moderated in recent years, so this year’s $220,000 lifetime expense is unchanged from 2013. That slowdown is the result of reduced costs for long-term prescription drugs covered by Medicare Part D, as well as lower per-enrollee Medicare expenditures.

Still, whether you retire at 62 or 67, health care is a big-ticket item—and you need to plan for more than just the medical bills. Fidelity’s estimates don’t include the cost of paying for long-term care services, such as a home health aide or a nursing home, in the event you become disabled.

Of course, the timing of your retirement isn’t always something you can control. About half of retirees report that they left the workforce earlier than planned because of health issues, a layoff, or to care for an elderly relative, according the Employee Benefit Research Institute.

If you want to retire early, or think you’ll be forced to leave the workforce, be sure to estimate your health care costs and budget that into your retirement spending. If you’re in ill health or have a chronic condition such as diabetes, you may need to set aside more money for doctor visits and prescription drugs. And take whatever steps you can to improve and maintain your health. “If you’re in your 50s, this is the time to take good care of yourself,” says McClanahan.

TIME Family

Americans More Likely to Care for Ailing Mom Than Dad

But dads are more popular patients

You better work on your relationship with your mom, because Americans are more than twice as likely to care for an ailing mother as for a father or spouse, according to a new poll.

Over 40% of Americans say they’ve provided long-term care for a sick mother, but only 17% say they’ve cared for an ailing father, according to the Associated Press/NORC released Monday. That probably has more to do with life expectancy than favoritism. What’s more, 83% of caregivers say providing long-term care has been a rewarding experience, and almost 8 in 10 say it’s strengthened their relationships with the care recipient.

But it’s spouses who cause the real stress, meaning “in sickness and in health” may be one of the most difficult wedding vows to keep. Over 60% of those who have cared for an ailing spouse say it’s caused stress in their families, compared to about 55% for other relatives. And 50% of those who’ve cared for a spouse say it’s been a drain on personal finances, while that number hovers closer to 20-30% for parents or in-laws.

Fathers end up being pretty popular when it comes to long-term care. Over 80% of those who have cared for a sick father say it’s been a positive experience and strengthened their relationship with their dad.

MONEY retirement income

Immediate Annuities: When Guaranteed Income Is a Bad Bet

An immediate annuity, offering guaranteed income for life, sounds great -- until life throws you curve balls. Photo: Shutterstock

Guaranteed income for life sounds great—until life throws you a curve ball.

It’s long been a mystery to economists: As MONEY has often noted, an immediate annuity is a great way to ensure you never run out of money in retirement; for a fixed sum upfront, you collect a monthly check for as long as you live.

So why do few people buy one? This disconnect, dubbed the annuity puzzle, has led regulators to try to add annuities to 401(k)s to encourage savers to buy them.

Turns out, savers had it right all along, even if they didn’t know why (a fear of dying young is what deters most). Almost half of retirees are better off keeping their portfolios liquid, not locked up in annuities, according to new research by Felix Reichling of the Congressional Budget Office and Kent Smetters of the Wharton School of Business.

The chief reason: the potentially high cost of health care. “One of the largest risks facing most retirees is running up hefty medical or long-term-care expenses that aren’t covered by insurance,” says Smetters.

Tying up too much cash in an annuity can produce a double whammy. A health crisis may cut your lifespan, which reduces the future value of your remaining annuity payments. Meanwhile, you need cash to pay for your care.

“The risks of health care costs are something most planners and investors knew intuitively,” says Michael Kitces, director of research at Pinnacle Advisory Group.

Still, adds Kitces, as long as you have a savings cushion for health care, the guaranteed income from an annuity can pay off if you end up living beyond your life expectancy. But take these steps first:

Build a health care nest egg. With Medicare covering only about half of medical costs, Fidelity estimates that a 65-year-old couple will spend $220,000 on health care expenses during retirement. And that doesn’t include long-term care, which some 70% of Americans will eventually need in some form, according to U.S. Department of Health and Human Services data.

That could be family help — what’s most common — or nursing care, at an average tab of $91,000 a year, reports MetLife. The average stay is three years.

Create a care plan. Thinking ahead can help reduce your long term-care expenses, says MIT AgeLab director Joseph Coughlin. For example, few baby boomers have made the kind of modifications to their homes — widening doorways or lowering countertops — that would allow them to stay put if they become disabled.

Preview your income. With enough set aside for health care, deploy the rest of your assets. Find out how much income your savings will produce with T. Rowe Price’s retirement income calculator. To see the benefits of putting a portion in an immediate annuity — perhaps enough to cover much of your fixed expenses — get quotes at immediateannuities.com, then head back to T. Rowe’s tool, entering the annuity as a pension.

“With a steady income, you’ll be better able to hang on to stocks, which can give you higher returns,” says Kitces. Given the spiraling cost of health care, every little bit helps.

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