Spiraling Health Care Costs Cause Sharp Rise in National Retirement Risk Index

Business Wire, Feb 19, 2008

Report Adds to Plethora of Evidence That Health Care Will Take a Large Bite out of Retirement Paycheck

COLUMBUS, Ohio -- A dramatic increase in the number of working Americans who likely won't be financially prepared to retire is largely due to the escalating cost of health care, according to the most recent findings by the Center for Retirement Research (CRR) at Boston College.

The National Retirement Risk Index, released today by the CRR, shows that 61 percent of today's workers will be at risk for not being financially prepared to retire. The 17-point increase from the previous Index number of 44 percent - released in July 2007 - demonstrates how the surging cost of health care is having a significant effect on retirement savings.

"Boston College's findings add another arrow to the quiver of pessimism - but not hopelessness - regarding the retirement savings and spending habits of Americans, especially as health care costs escalate and company- and government-sponsored retirement plans trail off," said Paul Ballew, senior vice president of customer insights and analytics for Nationwide.

"Additional research continues to provide substantial evidence that most consumers are less prepared today for their retirement years compared to five, 10 or 20 years ago," Ballew said. "For example, medical expenses have increased 43 percent in the last five years and will likely increase at a higher rate compared to overall consumer spending. And, health care now accounts for more than 20 percent of all personal spending; double what it was in 1970."

Ballew said most Americans are not only uncertain about their financial situations; they have not done any specific planning to deal with it.

"The personal savings rate in the U.S. today is essentially zero," he said. "And a recent survey by the Employee Benefits Research Institute shows that 44 percent of those respondents said they were 'guessing' as to how much money they'll need to save to live comfortably in retirement. They aren't seeking professional advice; they're not even using available tools or other resources. Fortunately there are countless resources - many of them free - that consumers can turn to for help."

Changes to Index reflect state of health care costs in the U.S.

The original NRRI did not explicitly identify health care consumption, but rather incorporated it as a component of total household consumption in the process of calculating the target replacement rates. When these rapidly rising costs are included explicitly, the percentage of households 'at risk' increases dramatically.

"We've said in previous Index updates that factors like declining Social Security replacement rates, the shift from traditional employer pension plans to 401(k)s, lower interest rates, and rising life expectancy all underscore the need for more retirement income," said Alicia H. Munnell, CRR director. "The wild card was the cost of health care and, not surprising to us, it made the Index soar by 17 percentage points.

"What that means is that 61 percent of households are not on track to maintain their pre-retirement, non-health care level of consumption in retirement. The Index also shows that risk will rise for younger workers and low-income households. The number could be considerably higher once long-term care costs are taken into account, and if households do not plan rationally.

"Our research continues to demonstrate that the retirement crisis is very real, and workers must plan now for their retirement years if they want to maintain their current standard of living," Munnell said.

The full report is available at the Center for Retirement Research at Boston College.

Overview of the National Retirement Risk Index

The National Retirement Risk Index, developed by the Center for Retirement Research at Boston College and underwritten by a grant from Nationwide, is updated twice annually. The Index is a percentage measurement of how many working Americans are 'at risk' of being unable to maintain their standard of living in retirement.

'At risk' means a household would be unable to maintain its pre-retirement standard of living in retirement. The amount of money people need while retired compared to pre-retirement varies, but is estimated to be from 65 to 85 percent, depending on household income and marital status. For example, most retirees need less than 100 percent of pre-retirement income because they tend to pay less in taxes and no longer need to save for retirement.

"The Index projects how much income households are expected to have in retirement relative to their pre-retirement income," Munnell said. "It then compares this "replacement rate" to a target rate that would allow a household to maintain its pre-retirement standard of living. Households that fall more than 10 percent short of the target are considered 'at risk.'

"This estimate assumes that people work to age 65 and annuitize all their financial assets, including the receipts from reverse mortgages on their homes," Munnell said. "More realistic assumptions regarding earlier retirement and the reluctance of people to annuitize their 401(k) balances or tap housing equity would put the percentage of workers 'at risk' considerably higher."