Session 162 PD, Managing the Impact of Long-Term Care on Retirement Security Part 1: A Holistic and Multi-Generational View Moderator: Steven W. Schoonveld, FSA, MAAA Presenters: John Cutler Anna M. Rappaport, FSA, MAAA Sandra Timmermann
ANNA RAPPAPORT CONSULTING STRATEGIES FOR A SECURE RETIREMENT SM Introduction: Long-Term Support and Services Facts Presenter: Anna M. Rappaport, Anna Rappaport Consulting Society of Actuaries Annual Meeting October 2014
Long-term Care and Retirement Security: What are the Issues? Cost of a major long-term care event: depletes retirement assets for families who purchase services Impact on the financial security of the surviving spouse Added responsibility and financial burden placed on caregiving family members Health and long-term care costs over what is planned for, and they outpace general inflation Increased longevity: greater likelihood of needing care Limited participation by middle income earners in the private insurance market Societal impact of an aging population on Social Security, Medicare, and Medicaid Long-Term Care 2014 2
Long-Term Care in America: Expectations and Reality 60% of Americans over age 40 have experience with longterm care: of this group 73% provided care 17% provided and received care 7% received care only 4% financially provided care Majority of caregivers (57%) provided care to a parent 83% of caregivers had a positive experience 15% did not have a positive experience 77% of caregivers said it strengthened their relationships 51% said it caused stress in the family Source: Long-Term Care in America: Expectations and Reality, Survey from The Associated Press and NORC, May 2014 Long-Term Care 2014 3
How is Long-Term Care Financed? Source % Comments Medicaid 62.2% Pays benefits to those with very low resources Program varies by state and is under pressure due to state budgets More than 50% is for nursing home care; home care is increasing Other public 4.6 Includes Medicare, VA, and others Out-of-pocket 21.6 Many families spend down assets and then go on Medicaid; does not include value of informal care Other private 11.6 Insurance benefits is largest part of this Expected value of all LTSS for a person turning 65 in 2005 was $47,000 (but distribution highly skewed) Source: Federal Long Term Commission report, page 31 and 23; based on 2011 data for chart and 2005 data for average cost Long-Term Care 2014 4
Private Long-Term Care Insurance Covers about 10% of care Usually pays benefits based on inability to perform 3 or 6 (or 2 of 5) activities of daily living Different types of policies Stand-alone long-term care LTC combined with life or annuity products Number of companies in market has declined and rates have risen May be eligible for tax benefits if certain requirements are met (HIPAA) Many seniors need some support but do not have current level of disability that makes one claim eligible Long-Term Care 2014 5
How Long-Term Care Affects Seniors Duration of Expected LTSS Need for Persons Turning 65 None 31% Under 1 year 17% 1-2 years 12 % 2-5 years 20% 5+ years 20% Distribution of Future LTSS Cost for Persons Turning 65 None 50% Under $10,000 25% $10,000 - $25,000 7% $25,000 -- $100,000 12% $100,000 or more 6% Long-term care also affects caregivers and family members Source: Federal Long Term Commission report, page 24 and 25 Long-Term Care 2014 6
Women Expected to Need Long-Term Care Longer than Men Age and Gender Nondisabled Life Expectancies in Years Mild or moderate disability More severely disabled Total Life Expectancy Male 65 12.3 1.5 1.5 15.5 Female 65 13.6 3.0 2.8 19.4 Male 85 2.9 1.0 1.8 5.7 Female 85 2.5 1.7 3.0 7.2 Note: Women less likely to have spouse who can offer care Source: Stallard, Eric, Estimates of the Incidence, Prevalence, Duration, Intensity, and Cost of Chronic Disability Among the U.S. Elderly, Society of Actuaries Living to 100 Monograph, 2008 Long-Term Care 2014 7
Where is Care Delivered? What Does it Cost? Where National Median Cost Comments At home $20/hour home health aide Majority of care is provided at home; most by family caregivers Adult day health $65 per day Supports care in the community care Assisted living $3,500 per month Provides care for those for whom independent living not appropriate but who do not need nursing home Nursing home $240/day private room $212/day semi-private Source: Genworth 2014 Cost of Care Survey Medicaid pays for majority of care; long-term care insurance would generally cover nursing home care Long-Term Care 2014 8
Speaker: Anna Rappaport Anna Rappaport, FSA, MAAA is an internationally known researcher speaker and author. She chairs the Society of Actuaries Committee on Post Retirement Needs and Risks and is a Past President of the SOA. She founded Anna Rappaport Consulting in 2005 after retiring from Mercer. She completed 50 years as a Fellow in 2013. Contact information: anna@annarappaport.com See www.annarappaport.com for more information Long-Term Care 2014 9
How American Society will Address Long-Term Care Risk, Financing and Retirement John Cutler Managing the Impact of Long-Term Care on Retirement Security October 29, 2014
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of any agency or the Federal government. 2
Everybody talks about long term care, but nobody does anything about it. Reported to be by Mark Twain, though slightly modified. 3
Special thanks to the Society of Actuaries and particularly their Pre-Retirement Needs and Risks (PRNR) committee for focusing on this issue. Their Call for Papers Managing the Impact of Long-Term Care Needs and Expense on Retirement Security: A Holistic and Multi-Generational View can be found at http://www.soa.org/research/research-opps/call-for- Papers/research-managing-impact-ltc-security.aspx 4
Thesis What if we have a crisis and no one comes? What if we muddle along and do nothing? Or rather, at best, we only move forward with incremental public initiatives. And the private sector similarly makes marginal product changes? What does America look like if we ignore all the warnings? 5
Counter point Something will happen. There actually WILL be some modifications or changes in public and private systems and many of these are already in play. In fact, it might well be that we ARE seeing long term care reforms underway but too incremental (and fragmented) to be obvious. So just what IS going on? 6
Topics Reviewed Medicare Medicaid Health insurance LTC insurance (including life and annuities) Social Security Pensions Housing and reverse mortgages Family, caregiving and the workforce 7
Deus Ex Machina At this point in my article we turn attention to whether there might be some major policy proposal or product that fixes all these problems and makes them go away. But major changes in public policy are few and far between. And product innovations come just as rarely. More importantly, individuals cannot plan for these. They cannot (or at least should not) assume they don t need to plan for the future because the government (or private sector) will wade into action. 8
Possibilities for more expansive reform The Commission on Long-Term Care William Galston at Brookings Robert Moffit at Heritage LeadingAge, and their guidelines (framework) for financing long term care The Bipartisan Policy Center The Society of Actuaries (multiple areas of research including this Call for Papers) Paul Forte and his American Long Term Care Insurance Program 9
So Where does that leave us? The tenet of this talk is not that there won t be changes in the way insurance and retirement will be addressed. To the contrary, it seems probable that there will be a wide array of policy proposals or product ideas to address the growing number of individuals moving into older ages and retirement. 10
So Where does that leave us? Even if a private market option is chosen it has to have government involvement. Both empirical research as well as expert opinion hold that the government must be involved as a key player. 11
So Where does that leave us? Will we really see a long term care proposal adopted on the scale of, say, the ACA? Most likely not. Instead it will be incremental. But while unlikely it is not impossible, especially if it is subsumed in something even larger such as entitlement reform. But the underpinnings are there now to be seen if any legislation is passed. Just as the 1965 Medicare law was essentially the Blue Cross Blue Shield standard option of 1964, any new social insurance legislation will be based on the experiences of the private insurance and retirement products of today. 12
Contact information John Cutler John.cutler@opm.gov or johncutler@yahoo.com 13
ANNA RAPPAPORT CONSULTING STRATEGIES FOR A SECURE RETIREMENT SM The Impact of Long-Term Care Costs on Retirement Wealth Needs Paper by Vickie Bajtelsmit and Anna Rappaport Presenter: Anna M. Rappaport, Anna Rappaport Consulting Society of Actuaries Annual Meeting October 2014
Paper Covers Background on retirement and long-term care Discusses impact on women Sets up four methods for private financing of long-term care Presents simulation research Provides conclusions Long-Term Care 2014 2
Bigger Retirement Planning Issue for Women Women live longer Expected to need long-term care longer than men More likely to be alone More likely to be caregivers when they are younger Age and Gender Nondisabled Mild or moderate disability More severely disabled Total Life Expectancy Male 65 12.3 1.5 1.5 15.5 Female 65 13.6 3.0 2.8 19.4 Source: Stallard, Eric, Estimates of the Incidence, Prevalence, Duration, Intensity, and Cost of Chronic Disability Among the U.S. Elderly, Society of Actuaries Living to 100 Monograph, 2008 Long-Term Care 2014 3
Four Options for Financing Care Insurance Savings CCRC Housing Equity Prevalence < 10% 15% of care pd out of pocket When to do Match to needs Applies to While still healthy Depends on contract, situation Middle and upper income Ongoing all ages No direct match Higher income and net worth Low, higher net worth only Time of entry and monthly Depends on contract, situation Higher net worth Little use of reverse mortgages When needed No direct match All levels who own home Long-Term Care 2014 4
Four Options for Financing Care (continued) Risks Costs no LTC need Issues for surviving spouse Taxation Insurance Savings CCRC Housing Equity Premium increases, costs exceed limits, situation not covered Investment risk, may not have enough money, difficulty of managing assets Monthly costs can increase, bankruptcy risk, don t know if needs covered Premiums paid None Buy-in price, higher monthly premiums Reduces risk of asset depletion Some policies tax advantaged Survivor may not have enough assets left Most retirement savings tax deferred Security of CCRC; higher monthly costs; possible relocation Part of price = insurance premium Equity unmatched to need, illiquidity, interest rates affect reverse mortgages None Survivor may not have enough assets left Gain on sale of house often tax free Long-Term Care 2014 5
Building Long-Term Care into Stochastic Retirement Modeling EBRI model Aggregate approach Focuses on entire population Identifies % of population who will not have enough money SOA Retirement Adequacy Study Individual approach Focuses on sample individuals near the middle Estimates how much money a household needs for retirement success Both studies: Shocks including long-term care are important Long-term care is a major factor in inadequate assets Long-Term Care 2014 6
EBRI Results: % of Households with Sufficient Funds to Pay Expenses Income Quartile Lowest Second Third Fourth No stochastic health costs With stochastic health costs 39% 89% 97% 99% 11 42 42 84 Long-Term Care 2014 7
SOA Study: Effect of LTC Insurance on Retirement Adequacy Wealth Needed at Retirement in 000s Median family Base Case: No LTC Ins. Buy LTC for Both Spouses Buy LTC for Wife Wealth at retirement: 50 th percentile Wealth at retirement: 95 th percentile 75% family Wealth at retirement: 50 th percentile Wealth at retirement: 95 th percentile $170 $227 $195 $686 $333 $338 $544 $599 $581 $1,011 $851 $871 Median family: $60,000 income and $100,000 non-housing wealth 75% family: $105,000 income and $250,000 non-housing wealth Long-Term Care 2014 8
Key Findings: Background Major LTC event can devastate retirement security for most households. For households below median who need an extended stay in nursing home, Medicaid is probably only viable option. Major private methods of financings LTC include insurance, savings, CCRCs, and use of home equity. Can be combined. None of these match needs perfectly. Some have better chance than others. Longest lived people most likely to have major needs. By age 80, 1/3 have some disability and by 86, majority have disability. Women have greatest challenges. Long-Term Care 2014 9
Key Findings: Simulation EBRI and SOA-RA models include long-term care and health risk in broader retirement simulation models. Many models exclude these risks. Results are very different when these risks are included. Huge difference between 50 th and 95 th percentile, because of shocks. Strategies like changing retirement age or reducing spending help at the median but can t handle the full impact of shocks. Advance planning for LTC very important for low and middle income households. LTC insurance can be useful for those in middle-income brackets. Long-Term Care 2014 10
Speaker: Anna Rappaport Anna Rappaport, FSA, MAAA is an internationally known researcher speaker and author. She chairs the Society of Actuaries Committee on Post Retirement Needs and Risks and is a Past President of the SOA. She founded Anna Rappaport Consulting in 2005 after retiring from Mercer. She completed 50 years as a Fellow in 2013. Contact information: anna@annarappaport.com See www.annarappaport.com for more information Long-Term Care 2014 11