Baby Boomers are in serious denial when it comes to their medical and long-term care costs in retirement. Yes, Medicare provides excellent health insurance (subsidized in large part by taxpayers). But it doesn’t come close to paying for a senior’s medical costs. And doesn’t pay for long-term supports and services at all.
Those holes in the Medicare system mean a couple turning 65 today will pay an average of $220,000 in out-of-pocket medical costs before they die, according to a new study by Fidelity Benefits Consulting. Those out-of-pocket costs include premiums, co-pays, and deductibles. On top of their medical care, two-thirds of those 65 and older will have some long-term care needs. And other studies estimate that each spouse can expect to pay an average of $50,000 on average for that care, on top of their health care costs.
That means a typical couple will need to put aside roughly $300,000 to pay for their care in old age. But Census Bureau reports the median net worth of an average couple at age 65 was only about half that in 2010. It is probably more now since the housing and stock markets have recovered from their lows, but it is still not close to $300,000.
Even more worrisome, Boomers think they’ll need only about $50,000 to pay for their health care in retirement. And many think Medicare will not only pay for health care but also for long-term supports and services. Sadly, they are wrong and wrong.
Medicare does pay for health care. And, as my Urban Institute colleague Gene Steuerle has shown, it provides very generous benefits. He estimates that a two-earner couple that turned 65 in 2010 can expect $387,000 in Medicare benefits, far more than the $122,000 they paid in Medicare taxes. A Boomer couple that turns 65 in 2020 will get $499,000 in Medicare benefits over their lifetimes.
But even with generous government benefits, they will still have to pay hundreds of thousands of dollars out of pocket.
Now, estimates of care costs in old age are all pretty rough. Other analysts come up with somewhat different projections for the lifetime health costs of seniors. For example, the Employee Benefit Research Institute calculated in 2012 that a couple would need to put aside about $165,000 at age 65 to have a 50 percent chance of paying for their lifetime medical (but not long-term care) costs. EBRI figured they’d need to put aside about $225,000 to have a 75 percent chance of paying all their medical costs in old age.
These estimated costs are falling a bit to reflect more generous Medicare benefits. They may decline further if the recent slowdown in the growth of overall medical costs has staying power. But even so, costs will be far beyond what many Boomers will be able to pay.
EBRIs presentation is especially valuable since it tries to reflect the uncertainties of predicting the future. Some of us will pay less than the average, but some of us will pay much more.
We know, for example, that a typical male over 65 will need a little less than 2 years of long-term supports and services over his lifetime, while a typical woman will need about 3 years of assistance. But those are just averages. A study completed several years ago found that one-third of those 65 and older will need no assistance at all, but one in five will need help for five years or more.
A separate EBRI study shows that household wealth crashes when someone has a long stay in a nursing home or uses a home health aide for long time. For instance, it finds the median household wealth falls from $102,000 when someone enters a nursing facility to just $60,000 after six months.
That collapse in assets, driven by both medical and long-term care costs, may partially explain why so many nursing home residents end up on Medicaid. As Josh Wiener found in his recent study, the vast majority of those who became eligible for Medicaid long-term care benefits never had much to start with.
And that’s the real problem. Millions of Baby Boomers are totally unprepared for the medical care and personal care they are likely to need in retirement. All the denial in the world won’t make those needs go away. And the consequences of ignoring the problem can be catastrophic.