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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