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By Steve Kelman

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Swap Social Security benefits for long-term care: Fair trade?

I know I am not the only boomer out there who feels healthy and has no real intention of retiring any time soon. I personally would have no problem if the retirement age was changed to 70, unless a person could prove poor health. A lot of people are living longer and healthier now.

I don't feel I really need Social Security to provide for my retirement income when I do retire. However, there is one financial issue involving old age that I do worry a lot about: outliving my assets if I am lucky enough to live to be really, really old. This is a version of a so-called tail risk, an unlikely event that would have bad consequences if it should come to pass.

How many of us feel confident that we would have enough assets to remain reasonably comfortable if we one day hit 90, 95 or even 100? Protecting against that risk is worth a lot to me.

One way of insuring against that risk is to buy long-term care insurance for nursing home or home care when one is really feeble and unable to take care of oneself. Such insurance policies are available but expensive.

Here's an idea — and I am soliciting people's reactions to see if this is worthy of being launched out there as part of the discussion about Social Security: What if the government were to offer an option whereby people eligible for Social Security pensions could trade the monthly check for a generous long-term care insurance policy the government would provide? The idea would be to give up the monthly pension check in exchange for insurance against an especially long life. In order for this to help with Social Security's solvency issues, the long-term care insurance benefits would have to be pegged at an amount that, on an actuarial basis, would save the Social Security system money.

And that's the rub because once the system is structured that way, people could take their Social Security checks, buy private long-term care insurance with their pension money and pocket the difference. Such calculating, self-interested people would never take the Social Security system up on the offer, thereby eliminating its money-saving benefits.

So my question is this: Who would be willing to take this trade, even though from an actuarial point of view the individual would be losing money or at least not gaining as much as possible?

I would. I wouldn't want to give up my Social Security completely because I have contributed into the system, but I am patriotic enough to be willing to take a somewhat lesser benefit, which also insures me against something that really worries me, to get the long-term care insurance and help the Social Security system. Any readers have an opinion on what they would do?

There's another possibility the government could try that would not directly require such a sacrifice, only a prudent risk aversion. Right now, people can put off receiving Social Security payments until they turn 70 in exchange for a higher monthly benefit when the Social Security payments start. Because a person choosing that option has forgone five years of Social Security payments, there is a break-even age of death below which it would have, in retrospect, been better to take the lower payments at a younger age and above which the higher payments at 70 are a good deal. When making the decision, an individual should think about whether he or she wants to use Social Security payments as an insurance to help if one lives a really long time. The more risk-averse you are about old age, the more attractive waiting is.

So what if the government set up additional options where higher benefits would start at 75, 80 or even 85, with, of course, the monthly benefit being considerably higher at those ages if you live to see them. Again, the break-even age should be set so that this serves to help with deficit reduction. But here, unlike the long-term care example, the individual would actually be better off if he or she lived to a very old age.

I think having that option available is a no-brainer, and it’s one I would definitely take, as long as the break-even age wasn't absurdly high, such as 110. Tell me your thoughts.

Posted on Aug 19, 2011 at 12:09 PM


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Reader comments

Mon, Aug 22, 2011 Steve Kelman

Thanks for these comments, and I welcome other reactions as well. I do want to emphasize that my idea would be voluntary, so nobody would be forced into this choice. I am increasingly inclined to think there are definite upsides and no downsides to the idea of giving people the alternative to receive a larger monthly check at 75, 80, or even 85 (the monthly checks would have to be quite large at those ages), extending the current ability to wait until 70. The monthly benefit should be set so that, on a risk-neutral ("expected value") basis, the governmnent comes out ahead -- thus reducing pressure on the social security system -- but that a person who is risk-averse and wants to protect against running out of money at a really old age would still potentially find it attractive. I would choose one of these late-starting options personally.

Mon, Aug 22, 2011 Maria

I like some of these options....as long as they are options where an individual can choose whatever best meets their needs. As long as the good Lord gives me my health, I probably will have to work until 70. The future of my investments for retirement are a big unknown...and my company retirement (State) is not even being funded properly, so I can't even take it into consideration, so I am thinking I will not be able to forego my S.S. benefits at all. In a perfect world where I could save enough myself to provide for my retirement, I would have no problem foregoing S.S. so that the system stays solvent....

Mon, Aug 22, 2011 Karla

No offense, but the majority of retirees couldn't afford to give up their Social Security checks in favor of long term care insurance. And, while the idea isn't totally without merit, It doesn't go far enough to address the medical needs of retirees. As a public employee, I will never see a dime of the money I've paid into Social Security over the years. That's okay. I've made plans that take that into consideration. But for the millions that rely on it, it's not enough with the prohibitive cost of care - even with medicare there is too much of a gap. That doesn't even factor in the cost of prescriptions. I have a few years before I retire, but I my parents, who have worked hard all their lives, are being inundated with medical bills that are astronomical to a person on a fixed limited income - and this is after medicare and their private insurance has made their payments. I believe that for people who have worked hard all their lives, have paid into social security or whatever retirement they have, they should not have to worry about medical expenses at all. Their healthcare should be provided to them at no cost - including prescriptions. Why should our seniors have to choose between food or getting their prescriptions or medical care? This is supposed to be the greatest country in the world, but we sure don't treat our people like that. These people cared for us and carried this nation when we were growing up. They paid in ways we have no concept of. It's our turn to pay them back and take care of them.

Sun, Aug 21, 2011 Sammy Finkelman

If you are in a nursing home, I don't think you'll have very much use for money. You might want money in order to stay out of a nursing home. If you are not willing to break the law (pay off the books) or find some other shortcuts, you should want about $7 million worth of insurance. One shortcut might be to have a live-in nursing student. You also might want to preserve your assets for other people, but keep them for yourself while you can. If this insurance is so profitable, maybe you could just use your Social Security to buy a policy - but maybe they don't really exist and how is need for care determined. If you don't Social Security now you might need it later.

Fri, Aug 19, 2011 GaryH Miami

One of the downsides of the long term care insurance option is that the person must qualify for the benefits, through inability to engage in daily living skills, and old age alone is not sufficient. Thus, under your proposal someone could forego Social Security Benefits, and never qualify for the long term care insurance payments if they remained healthy into their older years. This downside is corrected in your second proposal, in which Social Security benefits are delayed and increased to compensate for the delay. Here the payments are available to the healthy older person, who only bets that they would live longer, not live longer and meet some benefit test, as with the long term care insurance. I would consider the second proposal more desirable and would seriously consider it.

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