A] Prelude
For more information on pension systems, risk and coverage, feel free to visit our dedicated webpages:
https://expatpensionholland.nl/global-pillars-systems
https://expatpensionholland.nl/global-investments-risks-0
https://expatpensionholland.nl/global-social-security-coverage
For even more information feel free to visit the following external sites:
https://www.eiopa.europa.eu/eiopa-analyses-costs-and-performance-retail-investment-products-insurance-and-pensions-2023-12-18_en
https://www.netspar.nl/onderzoek/pension-fees-in-the-netherlands-united-states-poland-and-canada/
B] The Issue
A new Morningstar report warns that long-term care expenses could dramatically undermine the financial readiness of American retirees. But the study’s conclusions are facing pushback from a Washington-based policy expert, who argues the analysis exaggerates households’ actual exposure to those costs.
C] The Details
In “The Overlooked Cost: How Long-Term Services and Supports Impacts Retirement-Income Adequacy,” Morningstar researchers Spencer Look and Jack VanDerhei used a proprietary model to simulate the retirement outcomes of American households under two conditions:
- One that includes long-term services and supports, or LTSS,
- Another that assumes those costs are fully covered by outside sources.
The findings from the Morningstar Center for Retirement & Policy Studies published suggest that the inclusion of LTSS costs increases the share of households projected to deplete their retirement resources from 26% to 41%.
“The biggest decrease was for single females, with 52% projected to be at risk when LTSS costs are included, compared with 34% without LTSS costs,” the authors wrote. The report also projects that 43% of baby boomers will incur LTSS expenses in retirement. Among those who do, the estimated average present value of lifetime costs ranges from $185,926 for single men to $251,137 for couples. For all households needing LTSS, the conditional mean cost is $242,373.
The researchers also connected longevity risk and long-term care needs, noting that as people live longer, their probability of requiring care increases. For example, while just 24% of men who die at age 75 are expected to incur LTSS costs, that figure climbs to 52% among those who die at age 95. Among women, the dispersion of scenarios is even wider – from 27% to 60% depending on age at death.
D] Critical Questions
But Andrew Biggs, a senior fellow at the American Enterprise Institute, questioned the study’s core assumptions. “Morningstar’s estimates for the share of seniors who run out of money assumes that all long-term care costs are borne by retirees themselves. That’s just untrue,” Biggs wrote in a commentary.
Citing Congressional Research Service data, Biggs noted that in 2021, seniors paid just 14% of total LTSS costs out of pocket, with the remaining 86% funded through Medicaid, Medicare, private insurance, and other sources. “Total long-term care costs in 2021 equaled $468 billion. For context, that’s about 14% of seniors’ $3.3 trillion in total incomes that year,” he said, referring to the CRS figures.
Analyzing those numbers, he concluded less than 2% of seniors’ total incomes were used for out-of-pocket long-term care costs. “Even if government spending on long-term care were cut by 75%, Morningstar’s household costs would still likely be too high,” he said.
Biggs also took aim at the report’s use of private-pay cost data from Genworth’s 2023 Cost of Care Survey, noting that it measures full-pay private rates for long-term care. The assumption that a senior pays full freight for long-term care in later life – without support from discounts, government programs, or private insurance – doesn’t apply to the vast majority of older adults in reality, he argued.
E] Perspective
To be fair, the Morningstar report appears to acknowledge the limitations from how it modelled out long-term care costs for households in retirement. “These estimates reflect the costs a household would have to pay to avoid spending down to qualify for Medicaid-financed LTSS or otherwise relying on charity,” the authors wrote.
Morningstar’s researchers plan to explore alternative scenarios in future reports, including the potential mitigating effect of long-term care insurance and proposed legislation like the Well-Being Insurance for Seniors to be at Home Act.
F] Finally
The added value of the mentioned critical questions means at least that it is always highly advisable to question what the exact results are of a certain research: What is the topic, what are the parameters and what is excluded?