ElderWeb

Discussion about a bill before Congress to strengthen the bankruptcy law is stimulating a flood of disturbing stories and statistics about the rise of bankruptcies and mushrooming debt among seniors. Research done by the Consumer Bankruptcy Project at Harvard indicates that bankrupticies among people age 65 and older are growing at a much higher rate than among younger age groups, and that 48% of bankruptcy filings for those age 65 or older are related to medical bills. If you Google the web for "Bankruptcy" and "Seniors", you will find dozens of recent articles describing people who racked up unmanagable levels of debt for reasons like the following:

* Medical bills not covered by Medicare, often prescription drugs.
* Loss of pension and Social Security income when a spouse dies.
* Loss of pension or health benefits when a former employer eliminates or reduces retiree benefits.
* Inability to continue working after developing a medical condition.
* Cost of helping out children who had lost jobs or incurred debt, including helping out with the children's medical bills.

Seniors often deal with these costs by refinancing their homes or using credit cards. Eventually any retirement nest egg and home equity they may have had can be wiped out.

There is an interesting, and generally unheralded, development in the new Medicare bill which may be very useful in helping Boomers prepare for long term care costs.

The bill created Health Savings Accounts (HSA?s), which will be available starting this year (2004). These accounts combine a high deductible health insurance policy ($1,000 a year or more) and a medical savings account funded with tax-deductible contributions equal to the cost of the deductible. The HSA is like an IRA, a trust account that belongs to the participant. The IRS expects they will be made available by the same organizations that manage IRA accounts, like banks, brokerages, and insurance companies.

Several things about HSAs are notable. First, anything contributed to the account is deductible ABOVE THE LINE. A deduction above the line is the most valuable kind of tax deduction available. It will benefit all taxpayers, while the current medical expense deduction only benefits those who itemize expenses and have medical expenses that exceed 7.5% of their adjustable income.

Second, you can withdraw money tax-free for ?qualified medical expenses?, which include the same expenses that qualify for the current medical expense deduction, with some notable additions. Non-prescription drugs can be paid for from the account, even though they wouldn?t be deductible as itemized medical deductions. HSA money can also be used to pay long term care insurance premiums, as well as nursing home costs and some other long term care expenses.

Third, earnings on money held in the account are not taxed as they are incurred, and are NEVER taxed so long as the money is withdrawn to pay medical expenses. Therefore you get the best of all possible worlds ? a tax-deductible contribution AND non-taxable withdrawals!!

If you don?t use up the money in one year, it continues to earn interest and is available for medical expenses in later years. If you die without spending all the money in the account, it goes to your named beneficiary. If that is your spouse, it becomes a health savings account available for your spouse?s medical expenses. If it is passed to anyone else, they will have to pay income taxes on it, but the balance can first be reduced by paying qualified medical expenses for the original owner. Since most medical expenses are incurred in the year of death, there is probably a good chance any remaining balance could be used up in that year, and no one would end up paying taxes on it.

The plans will not be available to everyone. They will be available to anyone who is too young to qualify for Medicare, and only if they are not coverable under a low-deductible insurance plan. This is restrictive, but those who are eligible could include the self-employed, Boomers taking voluntary or involuntary early retirement who have no retiree group health plan available, and anyone working for a small business that has switched to a high-deductible group health plan as a cost-cutting measure.

How does all this figure into planning for long term care expenses? First, you could use money in the account to pay long term care insurance premiums. The transformation from an itemized to an above the line deduction will effectively reduce the cost of the premiums. This will make the most sense for people who are healthy enough that they do not need all the money in the account for other medical expenses. This group is most restricted on ways to deduct those costs as itemized deductions since you only benefit from an itemized deduction if you have fairly high medical expenses.

Second, and probably most importantly, you could fund the account every year, but try to pay medical expenses using other sources, with the goal of creating a sizable balance in the account that would be available in later years for tax-free withdrawals to pay long term care expenses.

I ran a ?what-if? scenario for myself to see what could happen. I assumed I would start adding to my account this year, fund it up to the regulatory limit each year, and not withdraw anything from it. Even at a very conservative interest rate I could easily have a balance in triple figures available to me in 20 years. By that time I will be in my early 70?s, a time when I am likely to start to need funds for long term care.

There are a number of restrictions that will keep this from being a viable solution for everyone.

First, the program will not be available to anyone who is coverable by a standard insurance plan.

Second, you must quit funding the program when you turn 65 and become eligible for Medicare (although the balance could remain in the account and continue to earn tax-free interest until you need it.)

Third, there are limits on the amount that can be contributed. For 2004 a single person can contribute no more than $2,600. Anyone age 55 or older can contribute a higher, ?catch-up? amount until they have to quit contributing at age 65.

Fourth, if you want to save the money in the account you have to keep withdrawals to a minimum either by having very low medical expenses or by paying those expenses from other funds.

Fifth, if you now have a lower-deductible insurance plan and switch to a high-deductible plan, your out-of-pocket expenses could increase by the difference in the deductibles, although your premiums will drop to offset part of that increase.

There are lots of questions still to be answered, and many things will only be clarified as we move forward. However, this may be one of the most interesting developments in the area of planning for long term care expenses that we have seen in several years!

Having spent nearly 20 years working with long term care and watching the way that it has evolved, I've decided to get out my crystal ball and offer some predictions about how long term care will be paid for when the Baby Boom generation needs help. In 2011 the first wave of that group will turn 65, and by 2021 they'll be turning 75. Few Baby Boomers understand what sort of long term care they might need and who will pay for it. Worse yet, even those that understand how the system works today probably have not considered what it may look like when they need it, a critical issue when deciding whether to buy long term care insurance or set up a savings plan to pay for these costs.

The National Center for Policy Analysis reports that Retirement Savings Plans (RSAs) benefit Americans at all income levels, but they are especially beneficial for low- and moderate-income families. Because of the Social Security benefits tax, many low- to moderate-income families may actually pay higher taxes when they retire.

Tax-Favored Savings Accounts: Who Gains? Who Loses? by NCPA Senior Fellow Laurence Kotlikoff.

In a new survey of some of the largest U.S. employers - conducted prior to passage of the new Medicare prescription drug legislation - 10% say they eliminated subsidized health benefits for future retirees in the past year, while 20% say they are likely to terminate retiree health coverage for future retirees in the next three years. These changes primarily affect new hires, rather than current retirees. The study also finds that 71% of surveyed firms increased retiree contributions to premiums in the past year, and 86% plan to increase such contributions within the next three years. The survey of large, private-sector employers was conducted and analyzed by the Kaiser Family Foundation and Hewitt Associates.

Employers are an important source of health insurance coverage for workers who retire before they are eligible for Medicare ("pre-65 retirees") and for retirees who have Medicare and rely on retiree coverage to fill in Medicare?s gaps ("age 65+ retirees"). For pre-65 retirees, employer-plans are typically the primary and sole source of health insurance coverage, while for age 65+ retirees, employer plans generally supplement Medicare, helping to pay for benefits, such as prescription drugs, that are not currently covered, and assisting with cost-sharing requirements under Medicare.

Other findings include:

* The total cost for employers of providing retiree health benefits to pre-65 and age 65+ retirees and their dependents increased by an estimated 13.7% from $18.1 billion in 2002 to an estimated $20.6 billion in 2003.

* 46% of surveyed firms have placed "caps" (pre-determined limits) on their future financial retiree health obligations while one-third of all surveyed firms offering health benefits to pre-65 retirees and age 65+ retirees have either hit their cap or expect to hit their cap on retiree health obligations within the next one to three years.

* 71% of large-private sector firms surveyed increased retiree contributions to premiums in 2003. Retiree contributions and premiums increased by 20% for pre-65 retirees and by 18% for age 65+ retirees between 2003 and 2003.

* 86% of surveyed firms say they are likely to increase retiree contributions to premiums and 70% expect to increase contributions for dependent coverage, within the next three years.

The 2003 study, the second survey on retiree health coverage conducted by Kaiser and Hewitt, was conducted between June and September 2003 with 408 large private-sector firms (1,000 or more employees) that offer retiree health benefits, including 45% of all Fortune 100 companies and 30% of all Fortune 500 companies.

Complete survey findings are presented in a new report, "Retiree Health Benefits Now and in the Future."

Kyodo News reports that the ruling Liberal Democratic Party's tax policy-setting panel decided Wednesday to lift restrictions on tax breaks on equity investment trusts for people aged 65 or older. This is intended to encourage older people to shift their money away from bank and postal deposits and into equities.

The American Institute of Certified Public Accountants and Harris Interactive polled high-income Americans to find out their attitudes toward financial planning and the use of professional help. They talked to 636 people with incomes of $75,000 or more, and found that most manage their financial affairs themselves. While they consult professionals in special situations, like when they inherit a large sum of money, they don't consult professional about day-to-day financial decisions they make. In many cases, they have made poor decisions -- 90% said they had lost money in the last five years because of quick decisions made without consulting anyone else.

The National Academy on an Aging Society (NAAS) is studying the characteristics of people who retire early and those who continue to work past normal retirement ages in order to make predictions about the retirement of baby boomers. They are examining two groups of people, those who retire at ages 51 to 59, and those who continue to work past age 60. Staying healthy appears to be an extremely important factor in the timing and quality of retirement, and the ability of retirees to be financially independent.

They found that those who retire before age 60 are more likely to be:

• Women
• Less educated
• In poorer health
• Less well-off financially

Those who work past age 60 are most likely to be:

• Men
• More educated
• In better health
• Financially well-off

Health was a significant differentiator, with non-workers highly likely to be in fair to poor health.

Health Status

There was also a correlation between health and financial status. Those in good health were likely to be far better off financially than those in poor health.

Financial Status

Median Household Wealth

In another study, NAAS found that health was a significant factor in the decision to retire. People with chronic health conditions were much more likely to say that health was an important factor in their decision to retire. For example, 76% of those with heart disease said their health was an important factor in their decision to retire, as opposed to 39% of those without heart disease.

A group of nine federal agencies has conducted a study on the physical, mental, and economic health of the aging population. This survey has revealed a number of interesting characteristics and trends, including a finding that the wealth of the retiree population soared from 1984 to 1999, while the wealth of the pre-retirement Baby Boomers decreased. The biggest decline in household assets during these years was experienced by those in the 45-54 age group, generally peak years for accumulating retirement savings. The 55-64 age group also experienced a decline in household assets, during a time of life when many have been taking early retirement.

The population age 65-74 saw their household assets increase by 74% during this 15 year period, from an average of $111,000 to $190,000, with the sharpest rise, 46%, in just the last five years. At the same time, the group from age 45-54 saw their assets decline by 23%, from an average of $109,000 in 1984 to $85,000 in 1999.

Labor force participation has also changed dramatically over the years. About 90% of men aged 55-61 were still in the work force in 1963, but that dropped to only 75% by 1999. The most dramatic decline was among men aged 62-64, whose labor force participation dropped from 76% in 1963 to only 47% in 1999.

While men left the workforce, women entered it. Labor force participation by women aged 55-61 increased from 44% in 1963 to 58% in 1999.

The report was a collaborative effort of the Administration on Aging, the Bureau of Labor Statistics, the Census Bureau, the Health Care Financing Administration, the National Center for Health Statistics, the National Institute on Aging, the Office of the Assistant Secretary for Planning and Evaluation, HHS, the Office of Management and Budget, and the Social Security Administration.

Older Americans 2000: Key Indicators of Well-Being.

A study commissioned by the Consumer Federation of America (CFA) and DirectAdvice.com notes that more than half of American households are behind where they should be in saving for a comfortable retirement. "The bad news is that most U.S. households will not be able to sustain their present standard of living into retirement," said CFA Executive Director Stephen Brobeck. "The good news is that most of the unprepared households could get ready by taking advantage of the magic of interest compounding. Saving just $25 a week for 40 years, with a 5 percent yield, will result in an accumulation of more than $165,000."

To help consumers, they have posted an online "Savings Calculator" that shows how compound interest can effect the amount of money a person could save over time by making simple lifestyle changes, like using store-brand coffee instead of "designer" coffee. (They calculate that would allow a 40 year old to save nearly $17,000 by the time he or she is age 65, at a 5% rate of interest.)

The Employee Benefits Research Institute (EBRI) has released the results of their 2000 Retirement Confidence Survey. This survey has been administered for ten straight years now, and survey results provide some interesting insight into the attitudes of employees about retirement.

In this year's survey, results were stratified by generations to see what differences exist in the attitudes of different age groups to some of the retirement questions. For example, they asked different generations what age they expected they would be able to retire, and found the youngest age groups anticipated retirement at much earlier ages than older age groups. Nearly half of the "Generation X" (under age 35) respondents believed they would retire by the age of 60, while only 19% of the "Pre-Retirees" (age 55 and up) expected to retire that early.

The EBRI concluded that many of the survey results continue to show a general lack of awareness about retirement planning. About 80% of all age groups expected to retire no later than age 65, but most had less than $100,000 saved up for retirement purposes, and few were aware that the age for receiving full benefits from Social Security had changed.

AARP's Modern Maturity Magazine just released the results of a new survey, called "Money and the American Family." This survey explored the attitudes of Americans about money and wealth. Survey results were stratified by age, gender, and ethnicity. Generally, respondents were very optimistic about their financial situation. 69% of respondents felt they were better off than their parents, and 67% expect that their children will ultimately be better off than they are.

Respondents also seemed to be planning for the future. 75% said they are saving for the future, and 62% of those who are saving are doing so to provide for their retirement. They reported extremely high savings levels. Nearly 50% said they were saving between 10% and 20% of their income, and 17% said they are saving over 20% of their income. Even with that high level of reported savings, 58% felt they were not saving enough.

Respondents also had relatively modest expectations about what it would take to make them wealthy. Over 50% would feel wealthy with an income of $100,000 or less, and assets of $500,000 or less.

The Administration on Aging has posted the results of recent focus group research in a report called Voices of Women: Perceptions and Planning for Long Term Care Focus Groups. (Women were interviewed in this project because they are statistically most likely to be both the recipients and the givers of long term care.) The focus group participants had a strong aversion to the idea of a nursing home stay, but had little information about the services which would allow them to remain at home. They were generally shocked to find out that nursing home care costs $47,000 a year on average, and that Medicare doesn'™t pay for much of that cost. Baby Boomer participants had not given much thought to preparing for their own future needs, since they were focusing on the more immediate needs of college and retirement savings. The report concluded that government programs must continue to find ways to heighten awareness about long term care issues, make information easier to access, and provide incentives for people to plan ahead.