Wikinvest Wire

Keep Working Or ...

Wednesday, March 15, 2006

From Fidelity Investments and CBS MarketWatch comes this forecast for retiree health care costs that doesn't seem to be lining up too well with trends in defined-benefit pension plans and the retirement savings plans that have replaced them for the working crowd.

After reviewing the data - rising life expectancy, soaring medical costs, and trends in retiree medical benefits - there seems to be only one sure way to fund medical care during retirement.

Keep working.

Better yet, keep working for a company with a generous health care plan.

This may come as an unpleasant surprise for middle-aged workers who are having difficulty making ends meet during their prime working years, often times borrowing against their homes to square the books.

But, there is little incentive to forego current consumption and save for the future, short-term thinkers that we are, as money seems to flow freely from real estate gains.

When you are 40, there is little appreciation for the different priorities associated with the quality of life at age 65, and the increasing number of seniors forced to use reverse-mortgages to fund their retirement weighs little on the younger crowd.

The numbers are sobering.

A 65-year-old couple retiring today will need on average a tidy $200,000 set aside to pay for medical costs in retirement, according to an annual Fidelity Investment study released this week.

Of course, as with any study, the devil is in the details. For instance, Fidelity's estimate, which assumes that Americans do not have employer-sponsored retiree health care, includes expenses associated with Medicare Part B and D premiums ($64,000), Medicare cost-sharing provisions such as co-payments, coinsurance, deductibles and excluded benefits ($72,000), and prescription drug out-of-pocket costs ($64,000). Fidelity's numbers do not include other health expenses, such as over-the-counter medications, most dental services and long-term care.

"It doesn't look hopeful," said Paul Fronstin, a senior research associate with the Employee Benefit Research Institute in Washington, D.C. and fellow at TIAA-CREF Institute whose research shows medical costs in retirement to be even higher. "It's a massive problem especially in light of what happens to Medicare over the next 14 years."
So what are some of the best ways retirees can pay for or reduce the cost of health care in retirement?

Keep working, especially for a company that provides health care. For many preretirees and retirees, the hard reality is this: Many will have to keep working out of need. Either they didn't save enough to pay for health care expenses so they need the income to pay for such costs. Or they need to work for a company that provides health care coverage.
They go on to suggest, among other sensible things like maintaining a healthy lifestyle and not stepping on any sidewalk cracks, that you could work for the government for five years and benefit from "Uncle Sam's rich retiree health care plan".


This is a topic that has been considered here before, but now that it has come up at MarketWatch, it's time to do a couple of quick calculations.

We've wondered for a while now what kind of savings could be achieved if federal, state, and local governments adopted the same sort of painful cost-saving measures that private businesses are currently foisting upon an unwilling workforce in the name of global competition and the bottom line.

Now, governments clearly have a different idea about what a bottom line should look like, and it gets worse as you get closer to the Potomac River, but it's time someone started thinking about this.

There are roughly 22 million government workers out of a total workforce of over 130 million, and there are likely millions more workers at private companies which are dependent enough on government contracts that their benefits don't suffer from the same competitive pressures that drive decisions for commercial companies.

So, suppose there are a total of 30 million government or "government-like" employees, all with 1970s era retirement plans and health care promises still intact.

Reducing these generous benefits by just a few thousand dollars a year, to be more in line with the rest of the workers in America could dramatically improve the nation's fiscal position.

Think of the possibilities - 30 million times $5,000 is $150 billion a year, which is about half the "official" budget deficit and about a quarter of the annual increase in U.S. government debt.

Oh Senator! Here's an idea for how to balance the budget.


Anonymous said...

I think he has the minimum amount of flair. He has a bad attitude, more flair old man!

BTW, the problem is not with the benefits that government has. Gov't employees take a cut compared to private sector in salaries in exchange for the increased benefits. The real problem is that the social contract in this country has broken down. The average worker has experienced the "boiled frog syndrome" where compensation has slowly been eaten away by the rise in healthcare and the outright cooking of the books that the FED Department of Labor has engaged in by distorting unemployment #'s and CPI over the last couple of decades. This distortion of statististic has hidden how bad off everyone has been and it has only gotten worse.

Don't believe me? Follow this link and the link in the article. Very sobering indeed!

Anonymous said...

Gubmnt workers have it good. Not overly compensated while they're working so they don't develop a lifestyle they really can't afford, then guaranteed income and medical benefits in retirement.

Doesn't sound good at 25, but it does at 65.

Anonymous said...

But at the end of the day, providing above-average benefits works only for marginal players. It appears to me that over the next few decades, a large part of the "problem" is demographic -- the boomer "pig" squeezing its way through the retirement "python". The issue of adequate medical care, at least for some time, may be capacity, not allocation (cost).

Anonymous said...

The first thing to ask with Us health care is why we spend over 16% of GNP while they average 9%? Then why do they have lower infant mortality, higher life expectancies and better overall health, eg, fewer years in bad health?

These questions are not in themselves an appeal for a single payer plan, though they do give it strength. They are fundamental questions on structure.

One issue is administration or bureaucracy. We pay somewhere between a quarter and a third of the health care dollar on this. They pay quite a bit less. The difference right here is several hundred billion.

Why can't a private system be as efficient? Would things like standardized records and forms help? Are there other ways to audit.

Then how do we decide to allocate resources? It seems our doctors are rushed and order treatments and test. Would a more rational analysis of patient need and desire result in greater efficiency?

Possibly. My hunch is yes. Then there are treatments thrown at people really sick, are many of them futile gestures?

Do we support a market. If yes, how do we oppose a system which at every level has devised feudal and mercentile protections. The Republican approach would use catastrophic insurance and 2 or 3 thousand dollar deductables, but lets say 150 million save 500 a piece, that's 75 billion out of 2 trillion. Helpful, but not system saving.

Of course every small piece...

Dare we propose a true market, in which doctors and medicines and procedures and hospitals are rated? And perhaps having insurance pay a fixed costs for not only specific treatments (exam, drug) but generalized courses of treatment such as responsdes to a specific cancer, then letting the patient pay or recieve the difference between the insurance rate and that of the provider?

Lots of ideas. One thing I can say is that focus on short term costs is hurting us. We see this with the poor who fill emergency rooms and wait until crisis is severe. Even when insured they are given the most cumbersome bureacracies that even the educated middle class can't navigate. So we get hundred thousand and bigger bills. Casr workers who really knew their needs encouraged them for their treatments, explained doctors opinions and navigated them through before problems became crisis could be of use to everyone, but especially the needy.

There are lots of ideas that could save a bit here and there. For example trying to build in market incentives that rewarded providers for long term health rather than the number of procedures used could help.

Anonymous said...

not sure where you guys came up with the idea that govt workers make less than private sector (except CEOs, VPs, etc.) i make over 100K working for the govt. 80-90 would be my pay range in the private sector.

it's a joke, but it's easier work, you can't get fired, automatic cost of living increases, rock solid stability, large pension, near $0 cost health care, blah blah blah...

agezna said...

If I worked for the US government, I would not feel as secure as I would if I were employed by legitimate market forces. With the huge budget deficits, the massive government spending, and looming demographic challenges, it seems to me that government is as big as it possibly can get without causing a revolt... how do 22 million people recieve lavish benefits if the private sector is impoverished? They cannot. You are a fool if you think the government will take care of you, even if you worked for them all your life.

Anonymous said...

I also work for the feds, and although my pay is pretty good because I am a GS-13 engineer (mid 90's) who works pretty hard... we have to pay SS, really do not have a retirement (we can put 15% into the savings plan and take a gamble on the market). And I agree, I really do not feel that secure. I doubt I will get a penny of SS when I get ready to retire in 15.

Anonymous said...

"Gov't employees take a cut compared to private sector in salaries in exchange for the increased benefits."

Cite, please. This quote is used to justify all kinds of financial chicanery.


Anonymous said...

For Tim and others- where is this thing that says one only has to work 5 years for the g'vt? For the pension and whatnot, yes, you have to work 5 years and not collect until 62, but I don't see where the health insurance benefits kick in after only 5 years...

Anonymous said...

anonymous @ March 15, 2006 6:12 PM: What I have heard mostly rumorwise is that governments (state, federal and local) tend to pay more for job categories like administration, clerical, business services (unless outsourced) etc. but less for those that we could euphemistically call "value-producing", e.g. everybody who in the private sector would actually create the things that bring in the profits, as opposed to "just" administering and supporting the process.

Anonymous said...

Perhaps another way of looking at it is that government pay scales are less biased by whichever metrics of perceived contribution to business. (Which is not to say everybody gets the same, but the spreads in comparable "grade levels" across job descriptions is not as large.) Industry, with its larger volatility, has to pay more to certain worker groups who would otherwise easily jump ship.

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