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Health Care Costs, Taxes, and the Retirement Decision. Rudolph G. Penner and Richard W. Johnson The Urban Institute Presented at the 8 th Annual Joint Conference of the Retirement Research Consortium Washington, D.C. August 10, 2006. Rip Van Winkle Simulation.
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Health Care Costs, Taxes, and the Retirement Decision Rudolph G. Penner and Richard W. Johnson The Urban Institute Presented at the 8th Annual Joint Conference of the Retirement Research Consortium Washington, D.C. August 10, 2006
Rip Van Winkle Simulation • “Fall asleep” in 2000, at age 35 • “Wake up” in 2030, at age 65 • Taxes and health care costs are much higher in 2030 than in 2000 • For how long must he delay retirement to receive as much income as under low-cost conditions?
Six Prototypes • Born in 1965, work continuously from age 30 until they retire • Married couples and single adults • Three income groups • low-income: husband and wife earns 40% of avg national wage • mod-income: hub earns 95%, wife 70% • high-income: hub earns 150%, wife 70% • Moderate and high-income have 401(k)
Annual Retirement Income at Age 65 (2030) in 2005 Dollars Married Couples Single Adults
Low-cost scenario assumes tax burdens remain at 2000 levels • In 2030, use 2000 rates • Increase tax parameters by the growth in average wage index • Personal exemption • Standard deduction • Exemption amounts for AMT • Income thresholds that set marginal rates and taxability of Social Security
High-cost scenario assumes tax burdens soar as Congress does nothing to restrain them • More people pay the AMT • More Social Security benefits subject to tax • Standard deduction, personal exemption, income thresholds that set marginal tax rates grow with CPI • Tax brackets creep upward as incomes rise faster than CPI
High-Tax Scenario Generates Tax Rates Above 14% for High-Income Retirees Married Couples Single Adults
Health Care Costs • Based primarily on imputations from Medical Expenditure Panel Survey • Grow to 2030, accounting for introduction of Medicare Part D • Low-cost: costs grow between 2000 and 2030 by change in CPI • High-cost: growth consistent with intermediate assumptions of Medicare trustees
In 2030, High- and Moderate-Income Couples May Spend $15,000 on Health Care at Age 65, in Today’s Dollars Married Couples Single Adults
The High-Cost Scenario Reduces Net Retirement Income by About 25% for Moderate-Income Couples Married Couples Single Adults
Workers Can Increase Retirement Income by Remaining at Work • Raise Social Security benefits • Limit actuarial reduction of early claiming • Increase 401(k) accumulations • Reduce the period over which 401(k) benefits must be spread
Retirees Could Receive About As Much Net Income Under the High-Cost Scenario By Working an Extra 2.5 Yrs Married Couples Single Adults
Our Estimates Likely Overstate the Impact of Taxes and Health Care Costs on Retirement • Most workers will likely partly respond by making do with less retirement income • People will experience some tax and medical cost increases before they retire, and thus save more • Rising taxes and health care costs will not lead to dramatic changes in retirement