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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. - PowerPoint PPT Presentation
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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
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
Low Mod High Low Mod High
401(k) annuitySocial Security
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
Age-65 Tax Rates, by Income and Tax Scenario, 2030
0%2%4%6%8%
10%12%14%16%18%
Low Mod High Low Mod High
Low TaxHigh Tax
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
Out-of-Pocket Health Care Costs, by Income and Cost Scenario, 2030 ($2005)
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
Low Mod High Low Mod High
Low CostHigh Cost
Married Couples Single Adults
The High-Cost Scenario Reduces Net Retirement Income by About 25% for Moderate-Income Couples
After-Tax Income Net of Out-of-Pocket Health Care Costs, by Income and Cost Scenario, 2030
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
Low Mod High Low Mod High
20
05
Do
llars
Low CostHigh Cost
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
No. of Years Worker Must Delay Retirement Beyond 65 to Equalize Net Income
2.4 2.5
0.5
2.0
2.62.8
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Low Mod High Low Mod High
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
