More Workers ‘Terrified’ They Cannot Afford Health Care in Retirement

The average cost of health care in retirement is nearly triple what Americans estimate.  

Inflation is pressing U.S. workers to delay medical care and downgrade health insurance as they lose confidence in their ability to afford health expenses and to maintain their physical and financial health in retirement.

Two-thirds of all U.S. adult survey respondents (66%) are “terrified” of the effect health care costs will have on their retirement plans and worry that a single large health care issue could ruin their finances for years to come. Even more (72%) said one of their top fears in retirement is out-of-control health care costs, and 61% said they are worried about living so long that they run out of money, found a Nationwide Institute survey published this month. For adults at least 50 years old, 62% are “terrified” of how health care costs may impact their retirement plans, an increase from 56% in 2014.

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“Considering the amount of anxiety we see from survey respondents about planning for health care expenses in retirement, plan sponsors should work with their recordkeepers to ensure the educational resources they offer take this challenge into account,” says Kristi Rodriguez, senior vice president of the Nationwide Retirement Institute, by email. “There continues to be a great opportunity for plan sponsors to do more than just help their employees save for the future. We’re seeing best-in-class plan sponsors begin to offer employees tools and resources to actually plan for what happens in the decumulation phase of retirement—and health care costs are an important part of that opportunity.”

More than half (59%) of respondents in every age group reported lacking confidence in their ability to pay for health care costs as they age, and 57% worry about their ability to pay for caregiving for their partner or spouse, implicating their retirement preparedness. In the U.S., 100 million people live with medical debt, according to 2021 data from KFF, formerly the Kaiser Family Foundation.

As workers grapple with longevity risk and economic factors, such as inflation, Nationwide found workers are making trade-offs to manage health care expenses, including:  

  • Nearly one in five (18% of) adults have postponed health care activities—like a medical procedure, physical exam or renewing prescriptions—in the past 12 months to save money;
  • To find additional savings, 10% of Americans said they are considering downgrading their health insurance plan because of high inflation, including 19% of Generation Z, 11% of Millennials and 14% of Generation X; and
  • Of those surveyed, 60% said they would pick a health insurance policy with a lower premium but higher deductible to have a cheaper monthly payment.

Retirement Planning Implications

Workers underestimated the average cost of health care in retirement, reporting anticipated expenses at an average of $55,343, although Fidelity Investments estimated $157,500 for an individual or $315,000 for a typical 65-year-old retired couple.

“Health care costs in retirement is a point of terror among most adults, but the majority are not sure or can’t even estimate how much their annual health care costs in retirement could be/are in retirement or their total health care costs in all of retirement,” the survey’s key findings section stated. “Even among those who provided estimates for health care costs, they may be underestimating costs.”

Following successive years of rising estimates, Fidelity’s health care costs were estimated to remain flat from last year, in 2023.

Nationwide also found that workers think their financial planning challenges may be exacerbated by artificial intelligence-enabled medical advancements that extend lifespans, as 26% said they expect AI advancements in health care to add more than a decade to their lifespan. Gen Z respondents expect AI to add an average of 15 years to their life, Millennials 12 years, Gen Xers eight years and Baby Boomers nine years.

“Advances in AI and health care technology in general are moving faster than ever and may help treat many of today’s chronic diseases, as well as other health issues,” Rodriguez stated in a press release. “While this is good news, longevity requires more planning.”

The Nationwide research was conducted online by the Harris Poll among 1,260 adults age 18 and older residing in the U.S., including 301 from Gen Z (18-26), 310 Millennials (27-42), 307 from Gen X (43-58) and 342 Baby Boomers and beyond (59+), with additional oversamples for a total of 549 Black adults and 512 Hispanic adults. The survey was conducted from August 28 through September 11.

SFA Recipients Are Not Investing in Return-Seeking Assets, Expert Says

The bucket recipients can use for stock investments is not being filled due to the attractiveness of investment-grade assets.

As of today, the Pension Benefit Guaranty Corporation has granted about $53.4 billion to struggling multiemployer plans that had either cut or were considering benefits reduction to their roughly 767,000 participants.

The money was allocated through the Special Financial Assistance Program established by the American Rescue Plan Act of 2021. A pension fund may qualify if it is insolvent, it is in critical and declining status, or it enacted a benefit cut under the Multiemployer Pension Reform Act of 2014.

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The PBGC requires recipient pension funds to invest at least two-thirds of the grant money in investment-grade fixed-income securities, but the remaining third may be invested in “return seeking assets,” though plans are not required to invest anything in RSAs.

The distinction between the two categories was recently clarified by the PBGC. IGFI can include Treasury bonds, investment grade debt and money market funds. RSAs include common U.S. stock and stock funds registered with the Securities and Exchange Commission.

Determining Asset Allocation ‘a Big Lift’

Colyar Pridgen, a lead pension solutions strategist at Capital Group, says recipient plans generally take one of two approaches to investing SFA funds. The first is to view SFA funds as being “in a bit of a silo” by keeping their legacy assets invested as they were previously and deciding how to best maximize the SFA funds. The other approach is to look at “the best overall solution” by pooling all of a plan’s assets into one strategy and then checking to be sure that strategy is compliant with PBGC regulations for the SFA funds.

Pridgen explains that since PBGC funds are legally constrained, it may be “sensible to inject a bit of risk into non-SFA assets.” Some plans have taken on greater equity and illiquidity risks with their legacy assets or invested in the “more exotic areas of fixed income” such as private or high-yield debt.

Though this might sound sensible, Pridgen says that “in practice, we see some of that, but not as much as might be expected.” He says this is because “it is a big lift to invest these SFA assets and to revisit all of their asset allocation.”

It is also difficult for pension trustees to examine the trade-offs between long and short investments and the needs of their older and younger participants. They are therefore disinclined to make significant changes in risk tolerance or overall strategy, even if the SFA grants might superficially seem to be giving them an opportunity to do exactly that.

The appetite to revisit old investment strategy varies from plan to plan, and “there hasn’t been a single convergence” in terms of how SFA money is being invested, Pridgen says, saying SFA investing strategies have been “fairly plan-specific.”

Conservative Approach Continues

Michael Scott, the executive director of the National Coordinating Committee for Multiemployer Plans, agrees that investment strategies are largely considered case by case but says SFA recipient pension funds have been acting rather conservatively.

The interim rules governing SFA financing used interest rate assumptions that made using IGFI assets an unfeasible investment strategy to maintain long-term solvency. To make matters worse, under those rules, SFA recipients could only invest in IGFI.

The final rules, adopted by the PBGC in July 2022, used a lower discount rate assumption and were therefore more favorable to an IGFI-focused strategy, Scott says. Additionally, higher interest rates made IGFI even more attractive to pension plans. The combination of those market and regulatory factors have led pension funds to invest their SFA money conservatively, and most plans have not been filling up their RSA “bucket,” according to Scott.

Central States: Too Early to Tell

Concerning legacy assets, Scott explains that many plans were in such bad shape that they had few legacy assets to speak of. One plan that did have significant legacy assets, the Central States plan, has historically followed a conservative strategy, Scott says, and even after having received SFA funding, it has continued to pursue an IGFI-driven portfolio.

The Central States, Southeast & Southwest Areas Pension Plan received $35.8 billion in special financial assistance in December 2022, bringing its total assets at the end of 2022 to $42.6 billion. The actuarial value of the funds’ assets at the end of 2022, excluding SFA money, was slightly less than $6 billion.

In its Form 5500 from 2022, received by the Department of Labor on October 12, 2023 but finalized just days after the 2022 SFA approval, Central States stated, “It is not yet known what the updates to the investment policy will be” until the PBGC finalizes the size of the grant and the investment restrictions.

Scott adds that the most common asset managers for SFA assets have been “J.P. Morgan [Asset Management], BlackRock, BNY Mellon, Loomis Sayles, Invesco and similar asset managers.”

According to Form 5500 submissions from 2021 and 2022, Central States used Northern Trust Investments, Mellon Investments Corp., BNY Mellon and BlackRock Financial Management as its investment service providers. The fees paid to these managers stayed largely stable despite the large cash inflow, no doubt because the grant came in the final weeks of the year. The largest increase in year-to-year fees was for Mellon Investments Corp., which received $3.1 million from Central States in 2022, up from $1.9 million in 2021, according to the filings.

Pridgen and Scott both say special financial assistance dollars are primarily being invested in more conservative portfolios, though there is significant plan-to-plan variation. Form 5500 submissions for 2023 may provide more insight into plans’ post-special financial assistance investing strategies, but those will not be published until October 2024.

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