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Session 162 PD, Managing the Impact of Long-Term Care on Retirement Security—Part 1: A Holistic and Multi-Generational View

Moderator:

Steven W. Schoonveld, FSA, MAAA

Presenters:

John Cutler

Anna M. Rappaport, FSA, MAAA

Sandra Timmermann

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ANNA RAPPAPORT CONSULTING

STRATEGIES FOR A SECURE RETIREMENT

SM

Introduction: Long-Term Support and Services Facts

Presenter:

Anna M. Rappaport, Anna Rappaport Consulting

Society of Actuaries Annual Meeting

October 2014

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Long-term Care and Retirement Security:

What are the Issues?

 Cost of a major long-term care event: depletes retirement assets for families who purchase services

 Impact on the financial security of the surviving spouse

 Added responsibility and financial burden placed on caregiving family members

 Health and long-term care costs over what is planned for, and they outpace general inflation

 Increased longevity: greater likelihood of needing care

 Limited participation by middle income earners in the private insurance market

 Societal impact of an aging population on Social Security, Medicare, and Medicaid

Long-Term Care 2014

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Long-Term Care in America:

Expectations and Reality

 60% of Americans over age 40 have experience with long- term care: of this group

– 73% provided care

– 17% provided and received care – 7% received care only

– 4% financially provided care

 Majority of caregivers (57%) provided care to a parent

 83% of caregivers had a positive experience

 15% did not have a positive experience

 77% of caregivers said it strengthened their relationships

 51% said it caused stress in the family

Source: Long-Term Care in America: Expectations and Reality, Survey from The Associated Press and NORC, May 2014

Long-Term Care 2014

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How is Long-Term Care Financed?

Source % Comments

Medicaid 62.2% Pays benefits to those with very low resources Program varies by state and is under pressure due to state budgets

More than 50% is for nursing home care;

home care is increasing

Other public 4.6 Includes Medicare, VA, and others

Out-of-pocket 21.6 Many families spend down assets and then go on Medicaid; does not include value of informal care

Other private 11.6 Insurance benefits is largest part of this

Long-Term Care 2014

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Source: Federal Long Term Commission report, page 31 and 23; based on 2011 data for chart and 2005 data for average cost

Expected value of all LTSS for a person turning 65 in 2005 was

$47,000 (but distribution highly skewed)

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Private Long-Term Care Insurance

 Covers about 10% of care

 Usually pays benefits based on inability to perform 3 or 6 (or 2 of 5) activities of daily living

 Different types of policies

– Stand-alone long-term care

– LTC combined with life or annuity products

 Number of companies in market has declined and rates have risen

 May be eligible for tax benefits if certain requirements are met (HIPAA)

 Many seniors need some support but do not have current level of disability that makes one claim eligible

Long-Term Care 2014

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How Long-Term Care Affects Seniors

Duration of Expected LTSS Need for Persons Turning 65

 None – 31%

 Under 1 year – 17%

 1-2 years – 12 %

 2-5 years – 20%

 5+ years – 20%

Distribution of Future LTSS Cost for Persons Turning 65

 None – 50%

 Under $10,000 – 25%

 $10,000 - $25,000 – 7%

 $25,000 -- $100,000 – 12%

 $100,000 or more – 6%

Source: Federal Long Term Commission report, page 24 and 25

Long-term care also affects caregivers and family members

Long-Term Care 2014

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Women Expected to Need Long-Term Care Longer than Men

Age and Gender

Non- disabled

Mild or moderate disability

More severely disabled

Total Life Expectancy

Male 65 12.3 1.5 1.5 15.5

Female 65 13.6 3.0 2.8 19.4

Male 85 2.9 1.0 1.8 5.7

Female 85 2.5 1.7 3.0 7.2

Long-Term Care 2014

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Source: Stallard, Eric, Estimates of the Incidence, Prevalence, Duration, Intensity, and Cost of Chronic Disability Among the U.S. Elderly, Society of Actuaries Living to 100 Monograph, 2008

Note: Women less likely to have spouse who can offer care

Life Expectancies in Years

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Where is Care Delivered?

What Does it Cost?

Where National Median Cost Comments At home $20/hour – home

health aide

Majority of care is provided at home; most by family caregivers Adult day health

care

$65 per day Supports care in the community

Assisted living $3,500 per month Provides care for those for whom independent living not appropriate but who do not need nursing home

Nursing home $240/day private room

$212/day semi-private

Medicaid pays for majority of care; long-term care insurance would generally cover nursing home care

Long-Term Care 2014

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Source: Genworth 2014 Cost of Care Survey

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Long-Term Care 2014

Speaker: Anna Rappaport

Anna Rappaport, FSA, MAAA is an internationally known researcher speaker and author. She chairs the Society of Actuaries Committee on Post

Retirement Needs and Risks and is a Past President of the SOA. She founded Anna Rappaport Consulting in 2005 after retiring from Mercer.

She completed 50 years as a Fellow in 2013.

Contact information: anna@annarappaport.com

See www.annarappaport.com for more information

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How American Society will Address Long-Term Care Risk, Financing and Retirement

John Cutler

Managing the Impact of Long-Term Care on Retirement Security

October 29, 2014

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Disclaimer:

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of any agency or the Federal government.

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“Everybody talks about long term care, but nobody does anything about it.”

Reported to be by Mark Twain, though slightly modified….

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Special thanks to the Society of Actuaries and particularly their Pre-Retirement Needs and Risks (PRNR) committee for focusing on this issue.

Their Call for Papers “Managing the Impact of Long-Term Care Needs and Expense on Retirement Security: A

Holistic and Multi-Generational View” can be found at http://www.soa.org/Research/Research-Opps/Call-For- Papers/research-managing-impact-ltc-security.aspx

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Thesis

What if we have a crisis and no one comes? What if we muddle along and do nothing? Or rather, at best, we only move forward with incremental public

initiatives. And the private sector similarly makes marginal product changes? What does America look like if we ignore all the warnings?

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Counter point

Something will happen. There actually WILL be some modifications or changes in public and

private systems and many of these are already in play. In fact, it might well be that we ARE

seeing long term care reforms underway but too incremental (and fragmented) to be obvious.

So just what IS going on…?

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Topics Reviewed

• Medicare

• Medicaid

• Health insurance

• LTC insurance (including life and annuities)

• Social Security

• Pensions

• Housing and reverse mortgages

• Family, caregiving and the workforce

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Deus Ex Machina

At this point in my article we turn attention to

whether there might be some major policy proposal or product that fixes all these problems and makes them go away. But major changes in public policy are few and far between. And product innovations come just as rarely.

More importantly, individuals cannot plan for these.

They cannot (or at least should not) assume they don’t need to plan for the future because the

government (or private sector) will wade into action.

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Possibilities for more expansive reform

• The Commission on Long-Term Care

• William Galston at Brookings

• Robert Moffit at Heritage

• LeadingAge, and their guidelines (framework) for financing long term care

• The Bipartisan Policy Center

• The Society of Actuaries (multiple areas of research including this Call for Papers)

• Paul Forte and his American Long Term Care Insurance Program

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So Where does that leave us?

The tenet of this talk is not that there won’t be

changes in the way insurance and retirement will be addressed. To the contrary, it seems

probable that there will be a wide array of policy proposals or product ideas to address the

growing number of individuals moving into older ages and retirement.

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So Where does that leave us?

Even if a private market option is chosen it has to have government involvement. Both empirical research as well as expert opinion hold that the government must be involved as a key player.

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So Where does that leave us?

Will we really see a long term care proposal

adopted on the scale of, say, the ACA? Most likely not. Instead it will be incremental.

But while unlikely it is not impossible, especially if it is subsumed in something even larger such as

entitlement reform. But the underpinnings are there now to be seen if any legislation is passed. Just as the 1965 Medicare law was essentially the Blue

Cross Blue Shield standard option of 1964, any new social insurance legislation will be based on the

experiences of the private insurance and retirement products of today.

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Contact information

John Cutler

John.cutler@opm.gov or johncutler@yahoo.com

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ANNA RAPPAPORT CONSULTING

STRATEGIES FOR A SECURE RETIREMENT

SM

The Impact of Long-Term Care Costs on Retirement Wealth Needs

Paper by Vickie Bajtelsmit and Anna Rappaport

Presenter:

Anna M. Rappaport, Anna Rappaport Consulting

Society of Actuaries Annual Meeting

October 2014

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Paper Covers

 Background on retirement and long-term care

 Discusses impact on women

 Sets up four methods for private financing of long-term care

 Presents simulation research

 Provides conclusions

Long-Term Care 2014

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Bigger Retirement Planning Issue for Women

Age and Gender

Non- disabled

Mild or moderate disability

More severely disabled

Total Life Expectancy

Male 65 12.3 1.5 1.5 15.5

Female 65 13.6 3.0 2.8 19.4

Long-Term Care 2014

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Source: Stallard, Eric, Estimates of the Incidence, Prevalence, Duration, Intensity, and Cost of Chronic Disability Among the U.S. Elderly, Society of Actuaries Living to 100 Monograph, 2008

 Women live longer

 Expected to need long-term care longer than men

 More likely to be alone

 More likely to be caregivers when they are younger

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Four Options for Financing Care

Insurance Savings CCRC Housing Equity Prevalence < 10% 15% of care pd

out of pocket

Low, higher net worth only

Little use of reverse mortgages

When to do While still healthy

Ongoing – all ages

Time of entry and monthly

When needed

Match to needs

Depends on contract, situation

No direct match Depends on contract, situation

No direct match

Applies to Middle and upper income

Higher income and net worth

Higher net worth

All levels who own home

Long-Term Care 2014

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Four Options for Financing Care (continued)

Insurance Savings CCRC Housing Equity Risks Premium

increases, costs exceed limits, situation not covered

Investment risk, may not have enough money, difficulty of

managing assets

Monthly costs can increase, bankruptcy risk, don’t know if needs covered

Equity

unmatched to need, illiquidity, interest rates affect reverse mortgages

Costs no LTC need

Premiums paid None Buy-in price, higher monthly premiums

None

Issues for surviving spouse

Reduces risk of asset depletion

Survivor may not have enough assets left

Security of CCRC; higher monthly costs;

possible relocation

Survivor may not have

enough assets left

Taxation Some policies tax advantaged

Most retirement savings tax deferred

Part of price = insurance premium

Gain on sale of house often tax free

Long-Term Care 2014

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Building Long-Term Care into

Stochastic Retirement Modeling

EBRI model

 Aggregate approach

 Focuses on entire population

 Identifies % of population who will not have enough money

SOA Retirement Adequacy Study

 Individual approach

 Focuses on sample

individuals near the middle

 Estimates how much

money a household needs for retirement success

Long-Term Care 2014

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Both studies:

 Shocks including long-term care are important

 Long-term care is a major factor in inadequate assets

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EBRI Results: % of Households with Sufficient Funds to Pay Expenses

Income Quartile Lowest Second Third Fourth No stochastic

health costs

39% 89% 97% 99%

With stochastic health costs

11 42 42 84

Long-Term Care 2014

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SOA Study: Effect of LTC Insurance on Retirement Adequacy

Wealth Needed at Retirement in 000s

Long-Term Care 2014

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Base Case:

No LTC Ins.

Buy LTC for Both Spouses

Buy LTC for Wife

Median family

Wealth at retirement:

50

th

percentile $170 $227 $195

Wealth at retirement:

95

th

percentile $686 $333 $338

75% family

Wealth at retirement:

50

th

percentile $544 $599 $581

Wealth at retirement:

95

th

percentile $1,011 $851 $871

Median family: $60,000 income and $100,000 non-housing wealth

75% family: $105,000 income and $250,000 non-housing wealth

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Key Findings: Background

 Major LTC event can devastate retirement security for most households. For households below median who need an extended stay in nursing home, Medicaid is probably only viable option.

 Major private methods of financings LTC include insurance, savings, CCRCs, and use of home equity. Can be

combined.

 None of these match needs perfectly. Some have better chance than others.

 Longest lived people most likely to have major needs.

 By age 80, 1/3 have some disability and by 86, majority have disability.

 Women have greatest challenges.

Long-Term Care 2014

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Key Findings: Simulation

 EBRI and SOA-RA models include long-term care and health risk in broader retirement simulation models. Many models exclude these risks.

 Results are very different when these risks are included.

Huge difference between 50

th

and 95

th

percentile, because of shocks.

 Strategies like changing retirement age or reducing

spending help at the median but can’t handle the full impact of shocks.

 Advance planning for LTC very important for low and middle income households.

 LTC insurance can be useful for those in middle-income brackets.

Long-Term Care 2014

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Long-Term Care 2014

Speaker: Anna Rappaport

Anna Rappaport, FSA, MAAA is an internationally known researcher speaker and author.

She chairs the Society of Actuaries Committee on Post Retirement Needs and Risks and is a Past President of the SOA. She founded Anna Rappaport Consulting in 2005 after retiring from Mercer. She completed 50 years as a Fellow in 2013.

Contact information: anna@annarappaport.com

See www.annarappaport.com for more information

11

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