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Mark Miller: Remaking Retirement

The 2021 Retirement Landscape

Medicare and Social Security solvency are among the top retirement challenges this year, says contributor Mark Miller.

The Biden administration and Congress will face a long list of retirement policy challenges--and their urgency has been accelerated by the pandemic.

Even before the coronavirus crisis, a large share of households faced the risk of a declining living standard in retirement. Half of Americans over age 65 who live alone lacked the resources to pay for basic living needs, according to the Elder Index, produced by the Gerontology Institute at the University of Massachusetts Boston. Two thirds of single Black retirees--and three fourths of single Latinos--have incomes below the index. Older women living alone have a 57% risk of economic insecurity, compared with 46% for men.

The pandemic has worsened the outlook, according to the National Retirement Risk Index, or NRRI, produced by the Center for Retirement Research at Boston College. The NRRI measures the share of working-age households at risk of being unable to maintain their pre-retirement standard of living by comparing projected replacement rates with target rates.

A forthcoming NRRI update finds that the index jumped by 2 percentage points because of the pandemic, to 51%. That figure understates the actual risk, since it was buoyed by rising stock markets and home equity values--assets that not all Americans own.

Unified one-party control in Washington boosts the odds of progress on some retirement policy challenges, although the closely divided Congress will require moderate, bipartisan support in many cases.

Here's a rundown of key challenges to watch this year along with my handicapping of the odds for action between now and the midterm elections of 2022.

Medicare Solvency
Perhaps the most urgent retirement challenge will be to avert insolvency of the Medicare Hospital Insurance Trust Fund. This is the component of Medicare that pays for hospital care, funded mainly through a 2.9% payroll tax split between workers and employers.

The hospital fund always has a projected insolvency date, as it balances payroll tax receipts against hospital costs. The insolvency date fluctuates a great deal--since 1970, it has been as close as two years away or as far as 28 years into the future.

The Congressional Budget Office projects that the fund will be drained in 2024. Before the pandemic, Medicare's trustees projected that the fund would be exhausted in 2026, but the job losses stemming from the pandemic have reduced tax receipts.

It's not hard to find sloppy analysis on this issue that paints the entire Medicare program as teetering on the brink of insolvency. It's important to understand that this problem is limited to the hospital fund; Medicare's outpatient (Part B) and prescription drug (Part D) programs are financed by general government revenue and beneficiary premiums. Both are adjusted annually to meet program costs, so neither face solvency problems.

The Medicare trustees estimate that at the point of insolvency, the fund would have sufficient resources to meet only 90% of its obligations, and the fund's ability to pay bills would deteriorate further from there; Congress would have to make decisions about how to address the shortfalls.

In the past, legislative fixes often have relied on reductions in payment rates to healthcare providers or by increasing payroll tax rates.

Odds of action: High. This is a must-do with serious consequences for our healthcare system if Congress fails to act.

Health Insurance Expansion
President-elect Joe Biden has called for expansion of coverage by adding a public option to the Affordable Care Act and by reducing the Medicare eligibility age to 60. The latter actually is a fairly incremental step: A study last year by the National Academy of Social Insurance considered a slightly different scenario--lowering the age to 62. The report found that move would add 10.1 million to the Medicare rolls, but only 670,000 who had been uninsured because this older age group already has a comparatively low uninsured rate. Those figures likely are somewhat higher now because of the pandemic. By contrast, reducing the Medicare age to 50 would add 57.3 million new enrollees, 4.6 million of whom would have been uninsured, the study found.

Odds of action: Medium to low. Health insurance companies will lobby hard against both of these reforms, since they would bolster low-cost competition that they don't want.

Social Security
Social Security's long-term solvency already was eroding before the pandemic, and it has accelerated a bit because of the economic downturn and accompanying slump in payroll tax receipts. Social Security's actuary now projects that the combined retirement and disability trust funds will be drained in 2034, one year earlier than the projection made before the pandemic.

At that point, Social Security would have sufficient income from current tax payments to meet roughly 80% of promised benefits.

As a candidate, Biden issued a detailed plan for Social Security that addresses the solvency problem by adding a new tier of payroll tax contributions for high earners. Currently, workers and employers split a 12.4% tax, levied on income this year up to $142,800. Biden would add a new tax at the same rate on incomes over $400,000. The trade-off here is that his plan extends solvency only until 2040--not for 75 years, as envisioned in more progressive versions of Social Security reform.

Dire predictions aside, the best reason to fix Social Security's problems sooner than later is to ease public worry. The closer to 2034 we get, the more likely that the solution will involve what I view as the right solution: Injecting new revenue into the system, not cutting benefits.

This is just math: Any benefit cuts almost certainly would not be applied retroactively to current beneficiaries; that means cuts could only apply to new beneficiaries. That wouldn't give Social Security the financial boost sufficient to repair its finances in the same way that an immediate injection of new revenue would.

New revenue could involve a gradual increase in payroll tax rates (one tenth of one percent a year for a couple of decades) or something new--for instance, a tax on Wall Street transactions. Or we could allow the trust fund to invest a small portion of its reserves in the stock market.

The economic devastation wrought by COVID-19 makes expansion of Social Security benefits more critical than ever. Biden has proposed a series of moderate expansions that should be passed into law. They include crediting caregivers in their benefits for time spent out of the workforce--a change that would especially benefit women, who already face a substantial retirement gender gap. He also would expand benefits for widows and seniors who had collected payments for 20 years.

Biden also favors shifting to a more generous yardstick for determining Social Security's annual cost-of-living adjustment.

Odds of action: Low to medium. These reforms are necessary, but it's difficult to see a bipartisan consensus emerging in the next two years, and Congress will have more pressing business that needs to get done.

Multiemployer Pensions
More than one million workers face the risk that their retirement benefits could be slashed owing to a meltdown of multiemployer pension funds.

Congress has been working on ways to protect the benefits promised to participants in these defined-benefit plans, which are created under collective bargaining agreements and jointly funded by groups of employers in industries like construction, trucking, mining, and food retailing.

Democrats and Republicans have very different ideas on how to solve the problem. Democrats favor a package of low-interest loans to prop up the funds, while Republicans want to boost insurance premiums paid by employers, add new premiums paid by plan participants, and force more-conservative accounting assumptions. No action was taken in 2020.

As many as 112 multiemployer pension plans covering 1.25 million participants are underfunded, and sponsors have told regulators and participants that they could fail within the next 20 years, according to a forthcoming report by Cheiron, an actuarial consulting firm that advises multiemployer plans, public employers, nonprofit organizations, and corporations.

The strong performance of the stock market may help these plans, but only in the short-term, says Joshua Davis, a principal consulting actuary at Cheiron.

"You're going to see healthy returns both in 2019 and 2020, but critical and declining plans have diminishing assets, so they can't benefit from rising markets the way well-funded plans can," Davis said.

Odds of action: Medium to high. This is an urgent problem and it affects some important voting constituencies in the Rust Belt and swing states. Democratic control of Congress boosts the odds that a solution will be implemented.

Long-Term-Care Turning Point
The pandemic has hit long-term-care institutions particularly hard, and the effects are likely to persist, including a shift to more home-based care and changing projections for the cost of care.

The horrific level of infection and death among residents and staff in care facilities has called into question the model of institutional care. Meanwhile, costs are jumping, driven by accelerating pressures on care facilities.

Many in the industry foresee a shift to more home-based care--but that's going to depend on our ability to shift to a more home-centered system of care. That has implications for our housing stock and communities, which are not geared for an aging population. Some of the needed reforms include:

  • A better approach to long-term-care insurance. Ideas for reform have surfaced in recent years, starting with a flurry of reports in 2016 that called for a hybrid public-private approach to financing long-term care costs.
  • Retrofits of homes to support older residents. Studies have shown the U.S. housing stock faces a major shortfall of age-friendly housing (for example, minimizing use of stairs, universal-design showers, doorways, cabinets, and using home technology to monitor health).
  • Age-friendly communities. Even if people have appropriate housing, they need to get out and about in their communities to maintain vital social connections and avoid isolation. Here, again, the U.S. is falling short--research shows that far too few communities measure up. And the availability of age-friendly housing that does exist is not equitably distributed among the population; it tends to be most available in more upscale, less-diverse communities.

Odds of action: Low. This won't be an obvious emergency to address at the federal level.

Retirement Saving
The immediate priorities on saving will include creation of a national automatic IRA and making the current saver's credit refundable, according to Melissa Kahn, managing director of retirement policy at State Street Global Advisors. 

On the regulatory side, the Biden administration likely will revisit the fiduciary requirements for advice on rollovers from workplace retirement plans to IRAs. The Obama-era fiduciary rule was overturned in 2018 by the 5th Circuit Court of Appeals, and Trump's Labor Department recently finalized its own rule that takes effect in February. 

Any new efforts in this area will revolve around fiduciary definitions, notes Aron Szapiro, Morningstar's head of policy research. He adds that the Securities and Exchange Commission, with a Democratic majority, also might strengthen fiduciary definitions for nonretirement accounts. 

"Between the SEC and the Labor Department, I would expect to see standards of conduct for advisors continue to be raised for both retirement and nonretirement accounts," Szapiro said. "Insurance agents may well continue to operate outside of these rules even when they sell products that are tied to the market, but that's something the Labor Department will surely look at."

Odds of action: Medium to high. On the legislative front, many of these items enjoy bipartisan support. Regulatory changes also are likely but may take more time.

Mark Miller is a journalist and author who writes about trends in retirement and aging. He is a columnist for Reuters and also contributes to WealthManagement.com and AARP The Magazine. He publishes a weekly newsletter on news and trends in the field at RetirementRevised. The views expressed in this column do not necessarily reflect the views of Morningstar.