Understanding the risk of need and availability of resourcesA recent study by the Center or Retirement Research at Boston College considers the risk of exhausting one’s retirement assets. Excerpts are provided below; access the full report here. Reprinted with permission.
The potential need for long-term services and supports (LTSS) can be a significant source of anxiety for older workers, retirees, and their families. A central question driving this anxiety is whether the support that retirees might need can be met without exhausting their financial resources and family caregivers. The first brief in this three-part series concluded that about 20 percent of retirees will escape the need for LTSS and 80 percent will need at least a year of part-time support – with around a quarter requiring full-time support for several years.
This brief, the second in the series, explores the extent to which retirees’ financial and non-financial resources together could meet different levels of care needs. The discussion proceeds as follows. The first section provides an overview of the types of care older adults typically receive. The second section explains the methodology for estimating the support that various family members and financial resources can provide. The third section describes the results, and reports that, at age 65, only about one-fifth of retirees have the family and financial resources to cover high intensity care for at least three years and about one third do not have any resources at all. The remaining half of older adults lie somewhere in between.
As one would expect, resources vary by marital status, education, and race. The concluding section looks ahead to the final brief, which will consider both the risk of needing support and the resources available to identify the types of people who are most likely to face unmet needs.
The initial brief in the series examined the odds of a 65-year-old needing different levels of LTSS – minimal, moderate, and severe – based on both the intensity and duration of their needs (see Table 1). Lifetime needs are based on an individual’s most severe experience. That is, a woman who breaks her leg requiring minimal care in her 60s, then has a bout of cancer in her 70s requiring more than a year of support, and then develops dementia in her 80s requiring more than three years of care would be counted once and classified as having “severe” LTSS needs.
The results show that roughly one-fifth of 65-yearolds will die without ever requiring LTSS and about one-quarter will have severe needs. In between these two extremes, 22 percent will experience minimal needs (gray shading) and 38 percent will experience moderate needs (pink shading). Households can provide for these care needs in two ways. The more common way is unpaid informal care provided by family members. The less common way is paid formal care, financed either out-of-pocket or through long-term-care insurance or Medicaid. So, the bulk of long-term care comes from family members.2 Paid care, either at a long-term care facility or at home, can be an alternative to relying on family caregivers. Paid care can also be costly. Only 11 percent of adults over age 65 have long-term care insurance, and Medicare covers only post-hospital nursing home care for up to 100 days and generally does not cover home care. Medicaid does cover care in nursing homes, and some states offer home care coverage through their Medicaid programs. Medicaid, however, requires that people exhaust their assets to qualify for benefits.
Total Hours of Care Needed
Care needs are measured along two dimensions: intensity and duration. The Health and Retirement Study (HRS) has information on the total hours per month of formal and informal care that respondents receive at each LTSS intensity level. Informal family care is the major source of care for respondents of all intensities, and as expected, those with higher LTSS needs receive a greater share of hours through paid care. To determine the total number of hours of care needed, we multiply the median annual hours by the upper-bound years of care needed for the low and medium intensity levels and by the median years of care needed for the high intensity level. That is, we use the durations of 1 year for minimal care, 3 years for moderate care, and 5 years for severe care. Assuming that all needs are met, these totals will be compared with the individual’s resources for LTSS care to evaluate preparedness for the different levels of care needs.
The next step is to estimate how much informal care 65-year-olds can expect to get from their family in the future under various circumstances. Since most 65-year-olds are still healthy and are not yet receiving care, we base our estimates on a regression for older individuals that relates their average annual hours of care received to their demographic and economic characteristics and to the intensity of their needs. Since the HRS does not have health information on caregivers other than the spouse, the regression uses data from the National Health and Aging Trends (NHATS) merged with the National Survey of Caregivers (NSOC). The regression results indicate that Black and Hispanic individuals tend to receive more informal care, while women receive less and that worse health is associated with more care received.
While family members are important resources for older adults, many retirees supplement family care with paid care, especially those with serious limitations. Paid care can be provided either at home or in a senior care facility. We estimate how much care individuals can purchase from their monthly income and from tapping their financial and 401(k)/IRA assets. Income. The monthly income individuals could afford to spend on paid care is calculated by looking at the difference between stable retirement income (such as Social Security, pensions, or annuities) and necessary living expenses. Income values come from the HRS and necessary living expenses are defined as the median consumption by marital status and income tercile, using the 2017 Consumption and Activities Mail Survey (CAMS). In the case of married couples, we assume that one-half of the unallocated income is available for each spouse. The median hourly rate for a home health aide in 2018 was $22.
Using that rate, we calculate how many monthly hours of care older adults can purchase using just their unallocated retirement income. Low-income individuals would be able to cover only 82 hours of paid care per year, middleincome individuals could afford 300 hours a year, and high-income individuals could cover about 1,000 hours a year. When spouses die, household income will likely decrease more than expenses. Additionally, care provided in a senior care facility is typically more expensive than a home health aide, so the number of care hours from income is likely an upper bound.
Determining Resources Available for Care
The amount of care that can be purchased from income and assets can be combined with available informal care to determine the total hours of care older adults can access. Adding up the total hours of care from income and assets is straightforward, but the number of hours of family care depends on the severity of the LTSS needs. For example, to determine if an individual has the resources for severe LTSS needs, we add the predicted number of family care hours available if the individual ends up with severe care needs to the number of paid hours the individual can afford with income and financial assets. If the total hours of paid and unpaid care are greater than or equal to the total hours required, this individual is said to have sufficient resources to cover severe care needs. This process is repeated for the other two severity groups to determine which resource group each retiree falls in.
Read the complete report here.