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New Research Impacts Retirement Policy

How much of the average retiree’s Social Security income is left after paying for medical care? How does health impact wealth in retirement?  How much of a role can home equity play to provide security in old-age?

These questions and many others were explored at the 19th annual Retirement Research Consortium Meeting, which was held on August 3-4 at the National Press Club in Washington, D.C.  It was organized by the Center for Retirement Research at Boston College, the Michigan Retirement Research Center, the National Bureau of Economic Research (NBER), and funded via cooperative agreements with the Social Security Administration.

The event showcased 21 papers from some of the nation’s top scholars. Much of the conference focused on the technical and methodological aspects of conducting research that influences policy, including how changes to Social Security will impact the behavior and consumption patterns of seniors. But several of the presentations addressed subjects of broader concern regarding health costs and retirement security.

In How Much Does Out-of-Pocket Medical Spending Eat Away at Social Security Benefits? authors Melissa McInerney from Tufts University, and Matthew Rutledge and Sara Ellen King of Boston College concluded that the average retiree loses a substantial share of his or her Social Security income to health expenses.

Focusing on out-of-pocket medical costs for Social Security beneficiaries ages 65 and older, the authors studied the adequacy of Social Security benefits, in relation to Old Age Survivors Insurance (OASI) income after out-of-pocket medical costs—including premiums, cost sharing (and services not covered) from all types of medical care, excluding long-term care.

Key findings:

  • The average retiree has only about 75% of his or her benefit left for non-medical expenses
  • Housing, taxes and non-housing debt represent about 30% of retirees’ household income
  • About 10% of retirees have less than one half of their OASI income remaining for non-medical expenses
  • Premiums comprise the largest share of medical spending for most retirees
  • Gaps in the Medicare benefit package contribute to relatively high out-of-pocket costs

In fact, Medicare beneficiaries pay more out-of-pocket for health care as a share of household expenses than non-Medicare households, and with health costs projected to rise more rapidly than Social Security income, these trends are likely to continue and worsen over time.

Amid growing interest in the impacts of late life medical expenses, another fascinating study, Financial Well-Being in Late Life: Understanding the Impact of Adverse Health Shocks and Spousal Deaths,was presented by authors  James Poterba from MIT and NBER, and Steven Venti, from Dartmouth College and NBER. Their study sought to understand the connection between health and wealth in retirement. Using Health and Retirement Study (HRS) panel data to examine the change in wealth after the first onset of eight health conditions and three intensive health events, the researchers considered the probability of onset of health problems from 65+ to death, and calculated the expected reduction in wealth of each health shock for an individual age 65 or older over their remaining lifetime.

The researchers figured the anticipated costs for those health shocks that they found specifically cause significant declines in net worth including stroke, cancer, lung disease, and health-related events such as hospital and nursing home stays, (including the loss of a spouse), and applied factors of net worth including home equity, other real estate, and business and financial holdings.

Some key highlights from the findings:

  • Someone at age 65 could expect a decline of between $30,000 and $90,000 in overall wealth depending on their gender and marital status due to health conditions
  • Some health shocks are more costly than others. Specifically, Lung disease ($29,000), stroke ($25,000), nursing home care ($15,000) and spousal death ($30,000)
  • The “wealth cost” of health shocks is about 9% of household net worth at age 65 for married individuals and for single men, but about 22% of net worth for single women

This research is especially important because of the aging population, increased life expectancy, and increasing health costs which shed light on the need for retirement planning that includes preparing for late life health shocks.

In a third study, “Homeownership, Social Insurance, and Old-Age Security in the United States and Europe,” authors Barbara Butrica and Stipica Mudrazija from Urban Institute posited that homeownership has always been recognized as a potential source of retirement security – a rent-free place to live in older age (after a mortgage has been paid off), and a resource to pay for unplanned health events or support general consumption. But since relatively few Americans have substantial savings outside of their employer-sponsored retirement plans, yet most own their homes, using home equity to improve retirement security remains a potentially attractive option for a substantial number of older adults.

Key findings:

  • Homeownership is an important asset for seniors in the U.S. and Europe
  • Housing wealth makes up a substantial proportion of senior net wealth globally (U.S. 55%, Germany 78%, and Spain 85%)
  • Differences in housing wealth and income distribution are sufficiently large that accounting for homeownership reduces income inequality and poverty rates
  • Assuming that 75 percent of home value is cashed-out, the U.S. households ages 65 and older could tap into more than $3 trillion of net housing wealth

Many governments are increasingly promoting homeownership as an effective way of building assets, a de facto self-insurance mechanism for old-age security, and a (partial) substitute for various social transfers. Future cohorts of older homeowners may be more receptive to using their housing wealth to supplement their retirement incomes. However, many younger Americans and Europeans may find it harder to build home equity than their parents’ generation. For middle-income households, home equity may be used to delay Social Security payments or entry into the Medicaid system.

Links to all of the materials from the conference, including paper summaries, and presentation and discussant slides can be accessed through the Center for Retirement Research at Boston College’s website showcasing the 2017 Retirement Research Consortium Meeting.

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