4 3 2 EBRI Comments of III. Some Considerations of the Task Force Proposal in Chapter VI argument for workers to invest in long-term care insurance given the adequate income, not all will be functionally dependent. Income ante who will or will not have L adequate retirement ,i income makes knowing Robert B. Friedland, Ph.D. illiquidity and risk of the investment and reduced marginal tax rates. adequacy, however, is normative over a broad range of income the advisability of reallocating retirement savings to insurance difficult. Research Associate T-59 The Task Force has proposed group long-term care insurance provided levels. Any proposal to reduce disposable retirement income Employee Benefit Research Institute or sponsored by the employer as the best way to encourage significant private The market for long-term care insurance is tentative, but growing. In Employer-provided pensions before for future the retirees are going to become must recognize some standard for income adequacy. financing of long-term care. The proposal outlined in Section C of Chapter general, education about current coverage and understanding about long- Task Force on Long-Term Care Health Policies increasingly more important sources of retirement income. This is due in VI, would encourage this development by enabling workers to purchase term care, clarification in the tax code, and public policy discussions, such as 3. Workers who reduce their pensions in exchange for long- part because of the projected growth in real pension income, scheduled qualifying long-term care insurance with their vested retirement assets this one, are likely to expand the importance of private financing. The term care insurance must not lose asset value because they fail to reductions in Social Security payments and Social Security's generally lower I. Introduction during their working years. Workers can trade-off future retirement income changing composition of the labor force due in large part to the rise in the make annual contributions to the plan. That is, either the wage replacement for retirees with relatively high pre-retirement earnings. for long-term care insurance and would be encouraged to do so by the tax average age of workers may encourage the growth in the private long-term insurance must be portable Statement or the prefunded on portion of the long- Although total real retirement income is projected to rise, earnings Thank you for the opportunity to review the June 17 th draft of Chapter code. care market. term care insurance must be returned to the employee. An replacement rates from pensions and Social Security, are projected to be VI, "Tax Incentives and Employment Programs." I would like to direct my Employer-Sponsored Long-Term Care Insurance important strength of the pension system -- and particularly slightly lower for the first half of the baby-boom than for workers retiring remarks to your proposal under section C, Employer-Sponsored Long-Term This proposal brings long-term care into the realm of retirement In dosing, I would like to congratulate the Task Force for the today. defined contribution pensions -- is that a change in employment Care Insurance. I have approached thisby task as a researcher and represent no income security. The Task Force's recognition that financing long-term care tremendous undertaking you have done to bring together the best thinking does not diminish the value of the accumulated asset even particular special interest. EBRI does not take policy positions and has no RETIREMENT SECURITY NEEDS is a part of financing economic security during retirement will have a on these issues and for advancing Robert B. discussion Friedland, on Ph.D. options to facilitate private though no contributions are made. position on this proposal. Research Associate tremendous impact on advancing public debate on private financing of financing of long-term care. I know that all of this effort will be very The risk of needing assistance with activities of daily living increases long-term care. productive. II. The Economic Status of the Elderly in the Future 4. The long-term care insurance and the reduced pension must before the with age and is likely to be greatest many years after leaving the workforce. be adequate to ensure access to the delivery of long-term care. The feasibility and advisability of the proposal, however, will depend Estimates of the lifetime risk of entering a nursing home suggest that the risk The elderly's relative economic status has improved dramatically over Task Force on Long-Term Care OTHER CONSIDERATIONS Health Policies on is theclose how past to it two negligible is specified. decades. until By I propose all after indage ications the 45;following ,at the leastnex one tcriteria cohort study to of suggests evaluate retirees that will thisthe o or n risk any proposal to exchange general retirement saving for insurance against the ave peaks rageat have 31 percent greater forincome men age than 75 re years tireesoldofand today. 57 percent Projectio for ns women from tage he 79 By investing in a long-term 16care Julyinsurance 1987 plan, workers may be relatively EBRI version unlikely, of thebut Pension financially and Ret catastrophic irement Income event of Microsi long-term mulation care need: model years old; another study suggests that the risk peaks at 46 percent for persons assuming more risk than they would if they made equal contributions to a age 90. (PRISM), developed by ICF Inc. suggest that the first half of the baby-boom, pension 1. plan. The value Insurance of theislong-term an illiquid care asset insurance and unlike plandefined plus the benefit asset plans those born between 1945 and 1954, and who will be retiring between 2012 and the insurance is not guaranteed. value For those of the who reduced need nursing pension home benefit care must or be extensive at least assistance equivalent at 2021 will have larger real retirement income then those persons now retiring. to the value of the pension benefit that would have resulted if home, we know with certainty that the cost of care can easily exceed the Pension recipiency is projected to increase, and among those with pensions, This proposal may not be feasible for defined benefit plans because the long-term care insurance had not been purchased. That is, the means of most middle income persons. Preliminary data from the 1985 average pensions will be greater. present value of the defined benefit is based on current, not projected, salary. purchase of the long-term care insurance must not result in National Nursing Home Survey suggest that average nursing home costs for This value may be too small over most worker's careers to pay long-term care intermediate care range from $1,315 to 1,900 a month. Assistance at home for reduced total asset value at retirement. This may be difficult to The projected growth in real pension income recipiency among future insurance premiums. Another difficulty would be how to handle long-term achieve if (1) the benefits paid by the insurance plan are re a tvictim irees isofpromising Senile Dementia, ; suggesting for example, that .s.o.me can employees exceed $14,000 may bea ab year. le to care insurance in conjunction with joint-survivor annuity elections. unindexed; and if the long-term care insurance plan provides restructure retirement saving without jeopardizing adequate wage Furthermore, what would happen in the case of divorce settlements that Preparing to meet the contingency of costly dependence on others for current coverage as well as an accumulation to finance future replacement in their retirement years. Which employees and how many is The views expressed in this statement are solely those of the include this pension. care requires planning long before retiring. Sufficient financing of long-term coverage. Whether the reduction in future retirement well an important empirical question. author and should not be attributed to the Employee Benefit care requires both adequate saving for probable events and insurance for being is significant will depend on the amount of the premium Research Institute, its officers, trustees, sponsors, or other staff. The proposal assumes that individuals will be motivated by relative relatively unlikely events. Poverty is projected to decline, however, some elderly will remain associated with current coverage. advantages provided long-term care coverage. Namely, withdrawn funds poor or near poor. Although we can model who these people are likely to be used to purchase long-term care insurance and any benefits paid by the plan 2. Retirement income adequacy must not be impaired for ex post, that is very different from knowing who they are ex ante -- that is, are tax exempt. The relative tax advantage however, may not be a compelling retirees that never need long-term care. While all retirees need early or mid way through their working careers. The inability to know ex EMPLOYEE BENEFIT RESEARCH INSTITUTE 2121 K Street, N_'/Suite 860 _V_'ashington, DC 20037-2121/Telephone (202) 659-0670