Data & Research April 18, 2014

Health Care Costs Will Exceed Social Security Benefits

Increasing health care costs are predicted to exceed the Social Security benefits of middle-class American retirees, new research finds.
Reported by

The Retirement Health Care Cost Index, from HealthView Services, shows that middle-class Americans’ retirement health care costs are on a path to exceed their Social Security benefits. The index measures the percentage of Social Security benefits required to pay for health care-related costs in retirement for a healthy couple receiving the average projected Social Security benefit at full retirement age.

The index indicates that retirement health care costs will increase from 69% of Social Security benefits for a couple retiring in one year to 98% of Social Security benefits for a healthy couple retiring in 10 years. For couples retiring in 20 years, 127% of Social Security benefits will be required to cover health care costs, and couples retiring in 32 years will need 190% of their Social Security benefits to cover health care costs.

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For an average healthy couple retiring in 2015, index data shows retirement health care costs will amount to approximately $366,599 in today’s dollars. In another 10 years, reflecting estimated health care cost inflation and Social Security cost-of-living adjustments, costs will rise to approximately $421,083 in today’s dollars.

“The index reveals an ugly truth. That over the course of time, retirees will need to use their entire Social Security benefit just to pay for health care,” says Ron Mastrogiovanni, founder and chief executive officer of HealthView Services, based in Danvers, Massachusetts. “Many Americans believe that Medicare will cover most or all of their health care costs in retirement. This is simply untrue.”

For wealthier couples receiving less than $170,000 in retirement income, a smaller portion of their benefits will be required for retirement health care costs than those receiving average Social Security benefits, but health care costs will still take up a sizeable portion of those benefits. For a healthy couple retiring in one year with one spouse earning maximum Social Security benefits, but earning less than $170,000 in total income, 39% of Social Security benefits will be required to cover health care costs. This will increase to 52% of Social Security benefits if they retire in 10 years.

If, however, the same couple earns more than $170,000 in retirement, they will be subject to the Medicare surcharge, which depending on their Modified Adjusted Gross Income (MAGI) raises Medicare Parts B and D premiums by between 35% and 200%. An affluent couple retiring in one year that falls into Medicare’s top income bracket will be responsible for an additional $255,267 in lifetime Medicare surcharges.

The index shows how the gap between annual health care cost inflation, which HealthView suggests is between 5% and 7%, and the 2% expected cost-of-living increases scheduled for Social Security will put increasing pressure on workers planning for future health care expenses. It also underscores the range of factors that need to be considered when planning for retirement including age, gender, marital status, health, where a person lives, number of years to retirement, and when Social Security recipients elect to receive their benefits.

“For middle-class Americans who tend to rely more on Social Security benefits, the differential between the health care cost inflation rate and Social Security cost-of-living adjustments is a time bomb,” says Mastrogiovanni. “The index highlights the need for a comprehensive and individualized approach to retirement planning that factors in expected health care costs. It also reinforces the need for adviser tools, such as our HealthWealthLink application, which show how decumulation strategies, including working longer, saving more, moving to a less expensive state, and Social Security optimization, will impact retirement plans.”

Total retirement health care costs measured by the index include all Medicare premiums, including Parts B and D, Medigap premiums, as well as out-of-pocket costs, including co-pays not covered by Medicare. The index assumes that the primary income earner will generate the Social Security average of $1,294 per month in today’s dollars and their spouse $817 per month. While health care costs tend to increase as retirees age, the index measures the lifetime average of health care costs.

The index draws upon HealthView Services’ cost data from more than 50 million annual health care cases and is calculated using an actuary-reviewed and physician-reviewed methodology that determines individual longevity and retirement health care costs based on age, gender, health, and time to retirement. HealthView Services’ methodology is updated regularly to reflect changes in health care cost inflation, Social Security cost-of-living increases, and regulatory changes.

HealthView Services (www.hvsfinancial.com) is a provider of retirement health care cost data and Medicare, Social Security, and long-term care retirement planning tools for financial advisers and individuals.

Compliance April 17, 2014

Plan Financial Audits May Uncover 'Red Flags'

When performing annual retirement plan financial audits, plan sponsors and their auditors should look for potential “red flags” for regulators.
Reported by

James E. Merklin, partner in charge of Assurance Services for the CPA firm of Bober Markey Fedorovich in Aktron-Ohio, explains, “Every year since ERISA was passed in 1974, employer-sponsored benefit plans, including retirement plans, with 100 or more participants have been required to undergo an annual audit of the plan’s financial statements by an independent auditor. The results of this audit are then included with the submission of that company’s Form 5500 paperwork to the federal government.” ERISA is the Employee Retirement Income Security Act.

Merklin tells PLANADVISER, “The auditors are looking to see if the statements are in line with generally accepted accounting principles, or GAAP. The auditors are looking to see how many types of transactions are present in the statements and how many they have to sample to reach a reasonable conclusion about the plan’s GAAP compliance. In this respect, the audit focuses on numbers and on making sure that disclosures are made properly.”

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Merklin says auditors are also looking to see whether or not the plan still qualifies for tax-exempt status. “One purpose of the audit is to make it less likely that the Department of Labor or the Internal Revenue Service will come along and say that your plan or company owes taxes,” he says.

But GAAP compliance and maintaining tax-exempt status are not the only things auditors should be looking for, added Merklin. “There may be some things that the plan is doing wrong, and that can eventually become a problem for both the plan sponsor and the plan. Plan sponsors shouldn’t be afraid to have auditors, as well as legal counsel, take a deep dive into the plan documents and examine whether areas such as contributions are being carried out properly. Plan sponsors want to be the first ones to be aware of any issues, before the DOL or IRS spot them.”

Merklin offers a list of additional tasks for plan sponsors and auditors:

  • Making sure the plan documents contain the correct definition of compensation, and that the definition is being applied correctly;
  • Looking for any instances of late remittances of participant contributions and loan repayments;
  • Looking for any instances of failure to comply with participant elections;
  • Looking for instances of improper application of eligibility provisions of the plan;
  • Making sure there have not been any instances of calculations of improper vesting and employee distributions;
  • Checking to see if there has been turnover of employees who have responsibilities relating to the plan, and whether current employees with such responsibilities are adequately trained;
  • Making certain the plan is being operated in accordance with the plan documents;
  • Asking who is responsible for making certain the plan documents are amended and restated in a timely manner;
  • Asking what oversight the plan sponsor performs with regard to third-party administration of the plan; and
  • Asking what the plan’s stated investment strategy is and how it is reflected in the investments offered to participants.

Merklin concludes, “Overall, plan sponsors have to ask ‘Am I doing things the right way?,’ whether it’s a large company that has the capability to do an internal audit or whether it’s a smaller company using an outside auditor. As the saying goes, an ounce of prevention is worth a pound of cure. Audits can potentially help plans to avoid a DOL investigation. Such investigations can continue on for months or even years, putting a drain on a company’s resources. Auditing plan documents before that happens can save companies a lot of time, money and aggravation.”

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