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Sobering Projection

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Jonathan Skinner writes

Fronstin (2006) estimates that a 55-year-old couple in 2006, planning to retire at age 65, would need to accumulate more than $400,000 during the next 10 years in order to afford supplemental health costs, beyond what Medicare already covers, through age 90. Even in the near term, projections based on the Health and Retirement Study suggest that by 2019, nearly one-tenth of elderly retirees will be devoting more than half of their total income to out-of-pocket health expenses. Thus, saving for retirement may ultimately be less about the golf condo at Hilton Head and more about being able to afford wheelchair lifts, private nurses, and a high-quality nursing home.

The main take-away from Skinner's paper is that you cannot answer the question of whether you are saving enough for retirement without making a forecast about health care expenditure. For a given level of technology, I can imagine private insurance taking care of the risk that a given individual will require expensive medical care in old age. But if you are 50 years old, your future medical expenses depend on what medical technology will look like 30 years from now. Rather difficult to forecast, I'd say. Is that a rationale for social insurance? I think David Cutler would say yes.

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COMMENTS (3 to date)
ed writes:
by 2019, nearly one-tenth of elderly retirees will be devoting more than half of their total income to out-of-pocket health expenses.

I guess this is supposed to sound really bad, but what does this actually mean? It could mean that you spend 5% of your income a year on healthcare most years, amd about once a decade you get sick and spend 70% for one year.

If that was the case, I certainly wouldn't be weeping for seniors; most of them own their own homes, have no kids to support, no expenses associated with working, and food and manufactured goods are getting so cheap that they're almost free. Seniors are both the richest and sickest segment of the population. Why shouldn't they spend, say, 20% or even 30% of their income on health care?

Matt writes:

They're assuming seniors will purchase all the latest and greatest healthcare. Why do you need wheelchair lifts, private nurses, and high-quality nursing homes? What's wrong with a 1 story home, public nurses, and average quality nursing homes?

I think what people need is some kind of option. We don't know what healthcare costs will be, therefore we won't save for it now. Insurance is a bad system, because if we stop paying we lose what we put in. There should be a way to save and invest for future health care costs.

michael writes:

a rationale for social insurance? I think NOT! So, because a particular good has a high cost (due to various and sundry non-market factors), those that DESIRE the good should be subsidized by those that have no current need? Isn't this just a form of inter-generational slavery? and I have no doubt that the slaves will revolt - just look at all those tattoos!

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