Canada's Pension reform still needs some work

A report on the latest pension reform by the Federal Government of Canada is interesting reading. The authors have made some interesting points. Two I agree with are:

1. The retirement income system requires regular review and adjustment to ensure it responds to ever-changing demographic, labor market and financial environments. The recently adopted changes to the CPP mark the third major reform in its 50-year history, and there have been smaller changes along the way. There is much to commend in the management of the CPP and the RIS more generally. But it could be substantially improved in several areas. In particular, the triennial review of CPP finances should be more open and transparent, and there should be a regular assessment of the income prospects of the current and future elderly. This will require addressing gaps in the data and modeling capacity of governments.
2. The individual reforms to the retirement income system introduced by the current government are a step forward. But, taken together, they amount to less than might have been hoped for. They are not coordinated, they ignore other components of the retirement income system and personal income taxes, and they fail to respond to evolving socio-economic conditions. What is needed is a holistic, forward-looking approach to pension reform. This is an area where governments will have to show leadership in assessing the retirement income prospects of Canadians and framing options for reform. Such leadership was much more evident in previous rounds of the pension debate.

No stress after retirement, think again

Many of us believe that we’ll finally be able to relax once we retire. It’s understandable to hang a lot of hopes on this phase of life. It’s easy to imagine how sweet, and stress-free, life could be if we didn’t have to go to work. Well, the problem with this image is that another important factor goes alongside it – in order to really be stress-free, we’d need to have plenty of money.

A new paper published in the Journal of Gerontology suggests that the period around retirement may widen socioeconomic inequalities in stress and health.

Poorer people, or people in low-status occupations, often have poorer health and higher biological stress response levels. The socio-economic-health gradient peaks around retirement in the United States and a number of European countries. This widening in health inequalities could be a reflection of the accumulation of socioeconomic disadvantages over a lifetime, with early life inequalities in health becoming magnified over the life cycle.

Retirement, however, could potentially moderate this pattern of widening health inequalities if changes in biological stress levels during retirement differ between socioeconomic groups. Higher stress levels associated with lower status work could be mitigated by retirement.

Retirement was associated with lower stress levels- those who had recently retired had lower stress levels when compared to those who remained in work. But on further investigation, this apparent benefit of retirement on lowering biological stress response levels was only confined to those in high-status jobs. Workers in the lowest status jobs had higher stress levels compared to those in the top jobs. And retirement increased, rather than decreased these differences in biological stress levels.

This study has shown that British civil servants employed in the lowest status jobs had the highest levels of stress compared to those in the highest status jobs. Socio-economic differences increase, rather than decrease, around the retirement period. These biological differences associated with transitions into retirement for different occupational groups may partly explain the pattern of widening social inequalities in health in early old age.

It may seem counter-intuitive that stopping low-status work which may be stressful does not reduce biological levels of stress, said the study's lead author, Tarani Chandola. "This may be because workers who retire from low-status jobs often face financial and other pressures in retirement. This study suggests that people's stress levels are not just determined by immediate circumstances, but by long run factors over the course of their lives.

Hidden cost in retirement: Healthcare

According to HealthView Services’ 2015 Retirement Health Care Cost Data Report, an average healthy couple retiring this year at 65 will require on average approximately $266,000 to cover Medicare Parts B and D and
supplemental insurance When expected vision, hearing, dental, and co-pays are added, their total lifetime health care costs will be $395,000. Ultimately, almost 70% of the couple’s expected Social Security benefits will be consumed by health care costs.  

The failure to plan for these costs will lead more Americans to draw down and potentially exhaust their retirement savings much earlier than anticipated.

Health Care Costs are unexpected and shocking to many retirees’. In the USA, the issue of increasing costs for health care and lack of government funding is highlighted in a report 2017 Retirement Health Care Costs Data Report written by HealthView Services.

Here is some interesting information from the report:

1)             Total projected lifetime health care premiums (Medicare Parts B and D, supplemental insurance, and dental insurance) for a healthy 65-year-old couple retiring this year are expected to be $321,994 in today’s dollars ($485,246 in future dollars). Adding deductibles, copays, hearing, vision, and dental cost sharing, that number grows to $404,253 in today’s dollars ($607,662 in future dollars).

2)             Medicare Part B premiums grew by 16% in 2016. The Medicare Board of Trustees originally projected a 24% Part-B decrease for 2017;3 instead, premiums increased 10%. The Trustees estimate a 1.3% decrease in 2018.

3)             Retirement health care cost inflation is projected to rise by 5.47% annually for the next decade, more than twice the amount of estimated Social Security COLAs. The average cost of supplemental insurance will rise at 7.12%, driven by annual projected premium inflation of 3.80% and an additional annual age-based increase of 3.32%.

4)            HealthView’s Retirement Health Care Cost Index® shows that a 66-year-old couple retiring this year will require 59% of their Social Security benefits to cover total retirement health care costs. A 55-year-old couple will need 92% of benefits, and 45-year-old couple, 122%.

5)            Women will face higher lifetime health care costs because they will live, on average, two years longer than men. Expected health care costs (for Medicare Parts B and D, a supplemental insurance policy, and all out-of pockets) for a healthy 63-year-old woman retiring this year (living to age 89) are projected to be $362,607 (in future dollars) – 29.9% more than a 65-year-old male ($279,176).

6)           Health care will be one of the most significant retirement expenditures; however, the savings required to cover this expense may be modest - especially if one has been utilizing an income replacement ratio (IRR) of 75% to 85%. Retirees can also significantly reduce costs by optimizing retirement portfolios to address health care needs.

7)           A 50-year-old male with type II diabetes can save (an average of) $5,000 per year in pre-retirement health expenses by shifting from Poorly Managed to Well Managed care. The difference in projected life expectancy is eight years.

8)           In addition to basic Medicare premiums, supplemental insurance, and projected average out-of-pocket costs, today’s 55-year-olds will need an extra $7,123 (male) and $7,681* (female) for copays and other expenses in their final two years of life. These figures do not include long-term care (LTC) costs.

9)           Health Care Costs and the Average American Couple Retiring Today

10)          The following analysis (Table A) reviews future health care costs for a 65-year-old couple retiring this year, as well as a 55-year-old and 45-year-old couple retiring at age 65. All calculations assume that a healthy male and female will have life expectancies of 87 and 89 respectively, and will have a combined future modified adjusted gross income (MAGI) of under $170,000.

Table A – Cost Projections for Medicare Parts B and D, Supplemental

Insurance Premiums, Dental Premiums, and Out-of-Pocket Expenses

Premiums		Out-of-Pocket	Total Costs (Present Value)	Total Costs (Future Value)
65-year-old couple	$321,994	$82,258	$404,253	$607,662
55-year-old couple	$410,002	$88,961	$498,962	$1,010,223
45-year-old couple	$537,480	$97,662	$635,142	$1,730,774

The information in the report is from 70-million health care cases, actuarial, and government data to project retirement health care costs.

The final calculations draw upon and are consistent with, government health care inflation forecasts.

Retirement health care cost projections include Medicare Parts B and D,* supplemental insurance premiums, and dental premiums. It is assumed that most Americans paid Medicare taxes while employed and will not be responsible for Medicare Part A. National averages are used for supplemental insurance premiums, which vary by state. Total lifetime projections comprise all out-of-pocket (OOP) expenses related to hospitalization, doctors and tests, prescription drugs, vision, dental hearing services, and hearing aids.

Calculations assume actuarial longevity for different health conditions and ages.

Three words about life