We need to get this to the Fiscal Cliff! What could go wrong? (Photo credit: DonkeyHotey)
Every few weeks, it seems, a new study comes out describing the boomers’ shaky retirement prospects, or their anxiety over their prospects, or why they should be worrying even more than they are about those prospects. So a new, comparatively upbeat analysis by the Employee Benefit Research Institute caught my eye---particularly since that respected non-profit research group has been one of those sounding the retirement alarm.
In fact, EBRI’s 2012 Retirement Readiness rating, issued just this past May, projected 44% of baby boomers and Gen Xers, even if they worked until 65, would not have adequate retirement to pay basic living expenses, Medicare premiums and out-of-pocket medical costs. But in that May report, someone projected to fall even $1 short, income-wise, was lumped in with those facing an impoverished old age. In a new analysis, EBRI Director of Research Jack VanDerhei more sensibly divides those now aged 34 to 64 into three distinct groups: those on track to have more than 120% of the income they’ll need; those who will have between 80% and 120%; and those most at risk, with less than 80% of needed income.
The good news is that 50.6% of early boomers (born through 1954); 51.6% of late boomers (1955 to 1964) and 49.1% of Gen Xers (1965 to 1974) are projected to have more than 120% of what they need. (That’s what they need for normal living expenses; VanDerhei isn’t saying they can all fulfill such retirement fantasies as buying a home in Europe.) Just 17% to 19% of each age group is projected to fall seriously short. Not surprisingly, it’s mostly those who are poor now who will also be poor in retirement. So while 54% of low income single women won’t have even 80% of what they need, just 1% of married couples in the highest income quartile and 5% in the next highest quartile are projected to find themselves in that predicament.
Those calculations carry two big asterisks, however. First, VanDerhei’s model doesn’t include the cost of an extended period of long term care. Instead, he assumes that a middle income senior who needs years of nursing home care (say because of Alzheimer’s), will eventually exhaust her resources and end up having her nursing home bills paid by the Medicaid program for the poor. That's pretty much the situation now. (No, Medicare does not pay for long term care.) Second, none of VanDerhei’s calculations account for Medicare or Social Security cuts that might come out of the current fiscal cliff negotiations, or a future deficit deal.
Here are some key points I take away from the EBRI studies and the deficit talks.
Most boomers and GenXers can survive a small reduction in Social Security’s annual cost of living adjustment (COLA). If any change in Social Security finds its way into the fiscal cliff deal now being negotiated, it is likely to be the adoption of the “chained" consumer price index to calculate the annual COLA, which would cut that increase by about 0.3% a year. House Speaker John Boehner (R-Ohio) has proposed applying the chained CPI not only to government benefits programs, but also to inflation adjusted parts of the tax code. That would save about $208 billion over 10 years, with $112 billion of that from lower Social Security benefits. President Obama reportedly came close to accepting this idea in his failed, summer 2011 effort to reach a grand bargain with Boehner. Obama's bi-partisan deficit reduction commission (a.k.a. Simpson-Bowles) embraced the idea and even the left-leaning Center for Budget and Policy Priorities has concluded switching to a chained CPI makes sense as part of a “balanced” deficit reduction package, so long as provisions are made to protect the poorest seniors and to provide a small benefit boost after a retiree has lived with the lower CPI for 15 or 20 years--something the Simpson-Bowles report recommended. Still, most liberal groups and the mammoth 50-plus lobby, the AARP, oppose the change. In a letter to Congress last month, the senior group argued that even the currently used regular CPI understates the rise in living costs for seniors, because rapidly rising health care costs represent an outsized part of their expenses. Even if that’s true, moving to a chained CPI has a lot going for it politically: it’s an obscure, technocratic (or sneaky, depending on your point of view) way to spread a small amount of pain to lots of seniors (including already retired ones) over many years.
But low income workers can't afford to have their starting Social Security benefits cut. That’s something policy makers need to consider before boosting the “full” or “normal” retirement age further. The full retirement age, now 66, is already scheduled to rise to 67 for those born in 1960 or later. Workers are still allowed to claim Social Security early at 62, but the higher their normal retirement age, the bigger the benefit cut they take if they claim their check at 62. Those born in 1937 or earlier had a normal retirement age of 65 and could get 80% of regular benefits at 62; those born in 1960 or later will get just 70% of normal benefits at 62. (Examples for more birth years here.) If the retirement age is raised further for the youngest boomers and the Gen Xers, something must be done to protect those low income workers who need to retire early because they’re in poor health or physically too-demanding jobs. While an increased retirement age might eventually be part of a plan to make Social Security solvent over the long term, it seems unlikely Congress will tackle it now. (Democrats say Obama has also taken off the table Republicans’ push to raise the Medicare eligibility age from 65 to 67---a move which, according to an analysis by the Kaiser Family Foundation, could actually lower out of pocket costs for the poor, since they’d end up covered by Medicaid instead.)
More than 80% of folks in the top income quartile have more than 120% of expenses covered---and they’re going to need that cushion. As result of a deficit deal, their Medicare premiums will almost certainly rise significantly. Currently, single seniors with adjusted gross income above $85,000 and married couples with $170,000 plus in income--the richest 5% of seniors--are charged extra income-related premiums for Medicare Part B, covering doctors and outpatient services, and Medicare Part D, covering prescription drugs. But House Republicans (and Obama in his September 2011 deficit reduction proposal) have embraced the idea of freezing that $85,000/$170,000 extra premium trigger until the top 25% of seniors, income-wise, are paying extra premiums. The Kaiser Family Foundation calculates that the 25% threshold will be reached around 2035 and that at that point seniors with the equivalent (in 2012 dollars) of about $47,000 in AGI for a single or $94,000 for a couple will pay the surcharges. How much extra? During 2013, those with income under $85,000 will pay $104.90 a month per person, while higher income seniors will pay anywhere from $146.90 to $335.70 per person a month, with the top levies charge to singles with AGI above $214,000 and couples above $428,000. (The full rate schedule is here.) Note that even while the threshold for “high income” is lowered, the extra percentage of costs high income folks will be forced to pick up is likely to grow. Think of it as means testing Medicare--light.
Congress needs to think twice before its slashes tax breaks for retirement savings. The percent of low income GenXers projected to have insufficient income has been shrinking with the spread of “automatic enrollment” in 401(k) plans, VanDerhei points out. Typically, unless workers opt out, 3% of their pay, plus an employer match, is put in a 401(k) and (if they don't pick their own funds) invested in a target date mutual fund. Years of even small contributions to a 401(k) can make a big difference in a retiree's financial security. But the tax breaks for retirement savings are a tempting target in any revenue raising tax reform, since they cost the Treasury $100 billion plus a year and disproportionately benefit high paid folks who, academic research suggests, just move around dollars they would save anyway in taxable accounts. VanDerhei fears--based on EBRI employer surveys--that a good number of small business bosses will drop their company retirement savings plans if they can no longer get a fat tax benefit for their own contributions. As economist and Forbes contributor Jeffrey Brown, the associate director of the Retirement Research Center at the National Bureau of Economic Research argues here, “any policy discussion should recognize the very important role that employers play as trusted sponsors of the plan, and be careful not to throw out the baby with the bathwater.”
It’s time for middle class families to start caring about what happens to Medicaid—and agitating for better choices on long term care. The nation’s baby boom budget problem can’t be declared under control until we develop an alternative to Medicaid getting stuck with big nursing home bills for once middle class folks. As Forbes contributor Howard Gleckman, author of Caring For Our Parents, reports here, the states are slowly expanding their provision of more cost effective (and usually more desirable) home based services. That's good. But a way must be found for middle class people to help fund at least some of the cost of their own long term care in advance and for government to provide more supports to family caregivers. In October 2011 the Obama Administration abandoned as unworkable a part of health reform (known as the CLASS Act) that would have created a national voluntary long-term care insurance system. Since then, there's been little political attention paid to what sort of structure might work better. While boomers and GenXers will feel some pain from the deficit cutting, most middle class folks should be alright—except for that long term care risk.
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