Have you heard this year's presidential candidates debate the Retirement Health Care Tax?
No? Probably because there is no official tax with that name. But it's out there, just the same. The Retirement Health Care Tax is a collection of expenses you'll pay for health care after age 65. And it should be a topic within the broader presidential campaign discussion of health care reform.
Retiree health poses a serious threat to the financial security of older Americans-and that doesn't mean today's seniors and Baby Boomers alone. Two new studies show that health care expenses are on track to consume huge portions of retirement resources in the years ahead for many Americans. And today's seniors and older Boomers are comparatively well-off compared with younger Boomers and the GenX'ers now in their mid-30s to early 40s.
Skyrocketing health care costs mean that 44 percent of Americans won't be able to maintain their standard of living in retirement, according to The Center for Retirement Research (CRR) at Boston College. The CRR projects that the average American couple retiring in 2010 at age 65 will need nearly $206,000 to cover health care over the rest of their lifetimes. That total soars to $284,000 for couples retiring in 2020 and on into the stratosphere from there.
Meanwhile, a separate study by Fidelity Investments came up with a remarkably similar average figure-$225,000 in lifetime expenses for a couple aged 65 retiring in 2008. Both studies excluded any benefits from supplemental employer insurance. They also exclude spending on over-the-counter medicines and long-term care.
The key expense components driving CRR's projections include:
-Medicare Part B premiums for physician and outpatient hospital services
-Medicare Part D premiums for drug-related expenses
-Co-payments for Medicare-related services
-Health care services not covered by Medicare
CRR projects annual inflation in these costs at 5.9 percent for the next 20 years, but that's a conservative estimate.
Along with rising prices, the Fidelity study found that big drivers of inflation included higher utilization rates for health care services, higher cost of new technologies, and an increase in certain chronic conditions such as diabetes.
Most American households don't have a clue what's about to hit them. CRR calculates that the average household approaches retirement with just $60,000 in retirement savings; that means income from Social Security will be used to bear the brunt of health care costs-money most of us figure will be available for other expenses.
Fidelity concluded that a 65-year-old worker today earning $60,000 who retires this year will spend 50 percent of pre-tax Social Security benefits to pay for personal health care expenses in retirement. Left unchecked, that situation is going to get much worse. CRR expects Medicare out-of-pocket expenses will consume 73 percent of Social Security income by the year 2080-and that figure doesn't include all the other health care expenses retirees will be incurring.
"Our health care costs are out of control," says Alicia Munnell, director of the CRR and a professor at Boston College's Carroll School of Management. "My sense is that the system is imploding. It's not reasonable to spend every dollar of Social Security benefits on healthcare. Something has got to change."
Lower-income households are at greatest risk, since they tend to rely most heavily on Social Security in retirement. But there also are generational differences. About half of older Boomers (age 53 and up), probably won't have enough saved to cover health care, CRR estimates; by contrast, 61 percent of younger Boomers (over age 44) are at risk, and 68 percent of GenXer's are facing problems.
But while we're waiting for health care reform, the experts do have some thoughts on the best ways to cope.
One obvious remedy: Start saving more. "It's difficult to tell someone in their 50s or 60s to save more, because there isn't enough time," Munnell says. "But for younger people, it can have a big impact."
Sunit Patel, a Fidelity senior vice president who specializes in health care matters, recommends doing that through tax-sheltered IRAs, 401(k)s or Health Savings Accounts (HSAs).
But HSAs are available only to people enrolled in high-deductible health insurance plans, and not all employers offer them. "People should ask themselves if they plan to retire before or after 65, and build different plans for the time before and after that age," says Patel.
Another important way to combat the Retirement Health Care Tax is to delay retirement in order to maximize your Social Security benefits. Those who take benefits before Normal Retirement Age (NRA) at 65 are penalized. And when you delay taking benefits beyond NRA, your benefit will be bumped up for every year you delay. Just to illustrate, an individual who waits until age 70 to file for Social Security will see benefits 32 percent higher than someone who starts at age 66.
What else can you do? Try to stay healthy. Says Munnell: "A little exercise and attention to diet can go a long way to improving retirement security."
For millions of Baby Boomers, retirement is an opportunity for reinvention, rather than taking it easy. Mark Miller is helping write the playbook for the new career and personal pursuits of a generation. Mark blogs at www.retirementrevised.com; contact him with questions and comments at mark@retirementrevised.com
