October 2019

Silhouettes of houses in a row

Boomers at 80: Housing Issues to Grow

The baby boom generation is continuing to work its way up the age ladder. The number of Americans over 80 will more than double to nearly 18 million over the next two decades.

And that’s partly because baby boomers are healthier and are living longer – they are also enjoying more of their retirement years free of disability than previous generations.  But unfortunately, boomers can’t avoid the inevitability of their growing vulnerabilities and the impact this will have on their day-to-day lives. A new report by Harvard’s Joint Center for Housing Studies makes some sobering predictions about the issues the oldest retirees can expect to face in the future, from widening income inequality to more people living alone and in isolation.

The findings, taken together, point to a range of potential trouble spots revolving around housing our aging population.

  • As people get old, their spouses die, their bank accounts dwindle, and their rents keep rising. For these and other reasons, housing creates more of a cost burden at 80 than at 65. The Harvard housing center defines someone as cost-burdened if they spend more than 30 percent of their income on housing. Today, nearly 60 percent of households over 80 fit this definition, and their absolute numbers will increase as more baby boomers reach that age. One place the financial strain shows up is food budgets: retirees who spend disproportionate amounts on housing spend half as much on food as people whose housing costs are under control. …
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People Tap IRAs After the Penalty Ends

Workers are apparently very eager to get their hands on the money in their retirement savings plans.

The evidence is the spike in withdrawals from IRA accounts that occurs soon after people turn 59½, the age at which the IRS’ 10 percent penalty on early withdrawals vanishes and is no longer a deterrent, according to a research study.

Average annual withdrawals from IRA accounts surge by about $1,965 to $3,540 – an 80 percent increase – after people cross the age 59½ threshold, according to the study, which was conducted for NBER’s Retirement Research Center by researchers at Stanford University, the University of Chicago, and the Federal Reserve Bank of Chicago.

Early withdrawals from tax-deferred retirement accounts – IRAs and 401(k)s – usually are not for frivolous reasons. This money tends to be tapped to ease financial hardships, such as unemployment, a disability, or a large, unexpected medical expense. But when older workers withdraw retirement funds – even for important matters – they may be chipping away at their financial security in old age. Withdrawals by high-income workers, on the other hand, will likely have little impact on their security.

The researchers analyzed taxpayer data from the IRS, which requires withdrawals to be reported at tax time. They compared withdrawals by people in the dataset for the two years before they turned 59½ with their withdrawals between 59½ and 60½.

While the penalty was in place, daily withdrawals were largely flat. But soon after people crossed the age 59½ threshold, withdrawals spiked before declining “to a new higher level than that of prior ages,” the researchers found. …Learn More

Part D Cost for Brand Name Drugs Rising

Reforms to Medicare Part D under the Affordable Care Act brought significant relief to retirees by reducing the share of medication costs they must pay out of their own pockets.

But with the healthcare reform now nearly a decade old, other developments have taken over that will drive up drug costs for the most vulnerable retirees – the biggest users of expensive brand name drugs. Although only a few million people will be affected, they are already saddled with the highest spending burden.

This vulnerable group could get some help from Congress. There is bipartisan support for placing an absolute limit on how much Part D policyholders must pay in total for their prescriptions, said Juliette Cubanski, associate director of the Medicare policy program at the Kaiser Family Foundation.

“That’s a positive development,” she said, “but there are also several areas of disagreement in the legislation being considered on the House and Senate sides.”

Under the Affordable Care Act (ACA), retirees are required to pay 25 percent of their total drug costs up to the annual threshold that qualifies them for catastrophic coverage – this dollar threshold is the total of their own payments plus the price discounts from manufacturers of brand name drugs. The upshot in 2020 for retirees is that those with the highest need could spend about $375 more out of their own pockets before they enter Part D’s less-onerous catastrophic coverage phase, according to a Kaiser analysis. And that’s just the increase for next year – their outlays will rise over the next decade. Medicare Part D flow chart
 
Once retirees enter the catastrophic phase, they are protected, because Medicare begins picking up the vast majority of the tab. But out-of-pocket costs are rising because the ACA’s controls on the spending threshold they must cross to qualify for catastrophic coverage have ended. …Learn More

Seniors climbing coin stacks

Most Data Sets Agree on Retiree Income

What kind of financial shape are retirees in?

A 2017 study refocused attention on this old question, and it has taken on greater urgency as more and more baby boomers retire.

The study looked at the accuracy of the U.S. Census Bureau’s Current Population Survey (CPS) and confirmed earlier research showing that it dramatically under-estimates retirees’ income. The under-reporting in the CPS could raise concerns about the accuracy of other surveys that paint a less-than-rosy picture of retirement life.

To get to the bottom of things, the Center for Retirement Research (CRR) dug into other standard sources of survey data on retired households so they could be compared with CPS data. They found that the income estimates in the CPS were much lower than the others and clearly the outlier – the other four data sets roughly agreed on how much income retirees have.

The CRR researchers then selected one of the reliable sources of income data – the Health and Retirement Study (HRS) – to assess how retirees are faring. They concluded that around half of over-65 households may be experiencing difficulty maintaining the standard of living they enjoyed while they were working. The researchers based this on the rule of thumb that they need about 75 percent of their past employment earnings.

To be sure, every survey has its strengths and shortcomings, because they rely on what people say they are getting from their Social Security, retirement plans, and investments. …Learn More

What if Medicare Paid Your Dentist?

Bar chart showing why retirees over 65 haven't seen a dentist in the last yearTwo out of three U.S. retirees do not have dental insurance. Their basic choice is paying their dentist bills directly or, if they can’t afford it, forgoing care.

A new report analyzes the pros and cons of one potential solution to this pervasive problem: adding dental coverage to Medicare. Several bills that have circulated in Congress, including the Seniors Have Eyes, Ears, and Teeth Act of 2019, would do just that.

This approach recognizes that teeth and gums have everything to do with one’s health, said Meredith Freed, a policy analyst for the Kaiser Family Foundation’s Medicare policy program. Elderly people with loose or missing teeth have difficulty eating nutritious but hard-to-chew foods. Gum disease, left untreated, increases the risk of cardiovascular disease, and diabetes, which is increasingly prevalent, makes people far more prone to gum disease.

Oral health care “has a significant impact on people’s happiness and financial well-being,” Freed said. Dental coverage under Medicare would “improve their quality of life.”

But a proposal to do this would face an uphill climb in Congress. Medicare is already under-funded. Dental care would only add to the program’s rising costs. Retirees do have another option: about two-thirds of the Medicare Advantage plans sold by insurance companies offer dental benefits. …Learn More

Red piggy bank on a yellow background

Does Increased Debt Offset 401k Savings?

Roughly half of U.S. employers with a 401(k) plan enroll their workers automatically, deducting money from their paychecks for retirement unless they explicitly opt out of this arrangement. This strategy is widely viewed as a good way to get people to save.

But auto-enrollment might not be as effective as it seems, if individuals are compensating for a smaller paycheck by borrowing more.

A new study of civilian employees of the U.S. Army used credit and payroll data to gauge whether debt increased for employees who were automatically enrolled in the federal government’s retirement savings plan. The researchers compared changes in debt levels for people hired after the government’s 2010 adoption of auto-enrollment with hires prior to 2010.

The good news is that since the broadest debt category, which includes high-rate credit cards, did not increase, it did not offset the employees’ accumulated contributions. Their credit reports showed no increase in financial distress either, the study concluded.

However, the findings for car and home loans were ambiguous, so auto-enrollment “may raise these latter types of debt,” said the researchers, who are affiliated with NBER’s Retirement and Disability Research Center.

If workers are, in fact, borrowing more, the question, again, is whether the new debt is offsetting the additional savings under auto-enrollment. Auto and home loans – in contrast to credit cards – are used to finance an asset that has long-term value. Whether these forms of debt improve or erode net worth depends on the asset’s value and whether the value rises (say, a house in a growing city) or falls (a car after it’s driven off the lot).

The researchers did not have access to data on federal workers’ assets, which they would need to see what’s happening to their net worth. This remains an important question for future research. …Learn More

What’s Driving the Longevity Gap

The decline in U.S. life expectancy is unlike anything we’ve seen  

Bombshell headlines like this popped up in major news outlets last November after the government reported that life expectancy in 2017 fell for the third year in a row.

This is a troubling break from the steady improvements in lifespans since 1900, which were powered by a combination of medical breakthroughs and healthcare policy. Early in the 20th century, antibiotics dramatically increased infant lifespans. Later, new treatments like statins and stents, as well as expanded access to healthcare through Medicare and Medicaid, increased life expectancy across the age range.

But there’s another story behind this story: life expectancy very much depends on where one falls on the economic ladder.

Between 1979 and 2011 – prior to the very recent fall in longevity – the increase in lifespans was much larger for more educated, higher-earning Americans than the gains for people with less education and lower incomes, according to a study by the Center for Retirement Research (CRR).

Smoking is an important factor in this socioeconomic divide. The decline in smoking and cardiovascular disease greatly contributed to rising longevity in the latter half of the 20th century. But while all Americans are smoking less today, those in lower socioeconomic groups still smoke much more. Today, one in four of them is a smoker, compared with just one smoker for every 10 people who attended college, the CRR found.

Looking ahead, education will remain a clear dividing line, and life expectancy will continue to depend crucially on the future prevalence and impact of smoking, as well as obesity, CRR predicted. …Learn More

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