The pressure put on Medicaid by baby boomers is prompting more people to invest in long term care insurance.
The crisis in long term care is a disaster 61 years in the making. It began in 1946, when the first post-war babies were born—in record numbers. It continued for 18 more years, as the “baby boom” continued. Things took a turn for the worse in 1964, when birthrates began to fall. The impact of the baby boom has been enormous. It has affected everything from school enrollment in the ‘50s and ‘60s to the economy of the ‘80s, ‘90s, and ‘00s. At the peak of their earning power, the baby boomers have generated record tax receipts and created a surplus in Social Security. That is about to change.
With the baby boomers in the workforce, there are now 3.3 workers for each Social Security beneficiary. As the boomers move into retirement, however, that figure will fall. By 2031, there will be only 2.1 workers for each Social Security beneficiary. The Social Security trust funds are projected to have surpluses each year until 2016. Trust fund reserves will grow to about $4,459 billion. In 2017, however, with about half the boomers at retirement age, tax revenues flowing into the trust funds will be less than total expenditures. Interest on the reserves and the assets will make up the shortfall—at least for a while. In 2041, when the first boomers are 95 and the last are 77, the reserves will be depleted. Incoming funds will cover only 75 percent of the scheduled benefits and administrative costs.
The boomers will have a similar impact on long term care. At least 72 million baby boomers will live to be 65 and older, according to the U.S. Census Bureau. According to the American Association of Homes and Services for the Aging (AAHSA), a nonprofit organization that specializes in elder care, 69 percent Americans who live to be 65 or older require long term care—the supportive services needed by people who lack the ability to take care of themselves for an extended period. If that percentage holds in the coming years, then 49.6 million of the boomers will require long term at some point.
The cost of that care will be staggering. Right now, the average cost of a private room in a nursing home is $74,600 a year and the average stay is 2.4 years. At those rates, the total cost of long term care for the baby boom generation would be $8.88 trillion. That averages out to $467 billion a year for each of the baby boom generation’s 19 years.
Who is going to pick up the tab? Nearly 60 percent of baby boomers are under the impression that Medicare pays for long term care. They are mistaken. Medicare pays for short rehabilitation periods, but not for long term care. Today 51 percent of long term care is paid for by individuals and long term care insurance; 49 percent is paid by Medicaid, the federal program covering low-income people.
Without reforms, the baby boom will put a tremendous strain on Medicaid. As a result, Congress is tightening Medicaid eligibility requirements. It is also giving tax breaks to individuals who buy long term care insurance. Long term care insurance is a special policy funded by monthly premiums that pays for long term care, if it is ever needed. The AAHSA estimates that the average long term care insurance policy purchased by a 65-year-old and held until death pays out 82 cents for every dollar spent in premiums.
As with all insurance, long term care costs less for younger, healthier people. The average annual long term care premium for individuals under 65 is $1,337. The average premium for individuals over 65 is $2,862. The sooner the boomers sign up for long term care insurance, the better off they are likely to be.
Steering Clear of the Long Term Care Crisis
