Opinion: The Perfect Retirement Investment Nobody Wants
By
Peter Coy opinion writer NY Times Feb 17
2023
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Two
of your biggest financial risks in retirement involve your health, but they’re
almost opposed to each other. One is that you will require expensive long-term
care early on. You will probably die young, but not before going broke from
nursing home bills. Another is that you will stay healthy enough to live a very
long life, but as a result you will run out of savings — even if you never
require long-term care.
More
than 20 years ago, the economist Mark Warshawsky saw a way to protect people
from both risks in a single product that could be priced low and still make
money for the insurer. I think his idea is ingenious, but it has never caught
on, for reasons I’ll explain.
Warshawsky
was the director of research at TIAA-CREF Institute in New York in 2001 when an
article titled “In Sickness and in Health: An Annuity Approach to Financing
Long-Term Care and Retirement Income” appeared in The Journal of Risk and
Insurance. He wrote it with Christopher Murtaugh, the associate director at the
Center for Home Care Policy and Research of the Visiting Nurse Service of New
York, and Brenda C. Spillman, at the time a senior research associate at the
Urban Institute in Washington.
Warshawsky,
now a senior fellow at the American Enterprise Institute, was a bit surprised
when I called him after being referred to him by others in the field. “No one
ever has taken me up on it, so for the last 10 years I have not pursued the
idea,” he said.
What
Warshawsky, Murtaugh and Spillman proposed was a hybrid product combining
long-term care insurance with an annuity — that is, a steady stream of payments
that lasts as long as the customer lives, like Social Security. Insurers could
charge less for such a hybrid product than they would have to charge if they
sold each product separately because the risks would partly cancel out. If the
customers needed lots of long-term care early on in the policy, they probably
wouldn’t live long enough to get a lot of annuity payments. If they lived long
enough to suck up lots of annuity payments, it’s probably because they hadn’t
needed much long-term care early in retirement. True, some customers might
become disabled at age 65 and live past 100, thus drawing on both sides of the
hybrid policy, but such cases would be rare.
Insurers
understandably worry about adverse selection, which is the risk that they’ll
get precisely the customers they don’t want and none of the ones they do.
People with health problems will apply for long-term care insurance without
disclosing them, driving up premiums and scaring away healthier people from
applying. To minimize that risk, insurers conduct extensive medical exams and
gather applicants’ and their families’ medical histories. But that’s costly,
off-putting to applicants and not foolproof. On annuities, the risk is the opposite:
that only people who have good reason to believe they will live long lives will
sign up, which forces the insurer to charge a higher premium for the annuity,
driving off other applicants, and so on.
Warshawsky’s
hybrid product would drastically reduce adverse selection because people
wouldn’t apply for the double-sided protection unless they perceived the two
risks for themselves as roughly balanced. In fact, Warshawsky and his
co-authors calculated that insurers could pretty much dispense with medical
exams and the gathering of medical histories because 98 percent of 65-year-olds
would be good bets for the product. Only people who were already in such bad
shape that they already qualified for long-term care would need to be turned
down for coverage, they calculated. What’s more, the premiums could be 3
percent to 5 percent lower than if the two products were sold separately, they
calculated.
Warshawsky
said he couldn’t get even TIAA itself interested. (The institute that he worked
for is a research arm of TIAA, the big financial services company.) Other
companies also passed. “You can never understand fully why companies don’t do
something,” he said. “There’s a zillion reasons.”
Actually,
I’m pretty sure I know one of those zillion reasons: A lot of people don’t like
either product separately, despite what many financial advisers tell them, so a
hybrid of the two is always going to be a tough sell. Moshe Milevsky, a finance
professor at the Schulich School of Business of York University in Canada, wrote
to me in an email that while he admires the Warshawsky-Murtaugh-Spillman
concept and thinks people should have both long-term care insurance and
annuities, combining them is unlikely to “change the ingrained bias against
long-term rational risk management.”
Annuities
got a somewhat deserved reputation for being overly complicated and expensive,
but there are new products that are
standardized and cheaper. Still, there’s a lingering problem of “not wanting to
commit and mistrusting the insurance companies,” Robert Shiller, a Yale
University economist, wrote to me by email.
For
a practitioner’s perspective I interviewed Ryan Pinney, the president of Pinney
Insurance Center in Roseville, Calif., which is a broker to insurance agents.
(Pinney also has a company, WholesaleInsurance.net, that sells direct to
consumers.) He said there are relatively few people who are willing to give
away a big chunk of their savings all at once, even if it’s for a rational
reason, namely to buy an annuity that will pay them monthly checks for the rest
of their lives. Warshawsky’s product would require them to do that.
Pinney
referred me to OneAmerica Financial Partners, an insurance company in
Indianapolis that sells a product combining an annuity with long-term care
insurance. But Dennis Martin, OneAmerica’s president of individual life and
financial services, told me that his company’s product isn’t quite what
Warshawsky had in mind. One difference is that people aren’t required to turn
the pool of money in their accounts into an immediate annuity; they can choose
whether to use the money to pay for long-term care, but any unused funds are
paid out at death. So the natural hedge that Warshawsky’s concept depends on
doesn’t exist.
“Mark
has done really good work on this, and I think his combination concept is
promising,” Mark Iwry, a nonresident senior fellow at the Brookings Institution
and former senior adviser to the Treasury secretary, told me. But, he said,
“It’s been a multidecade challenge to get people to buy, and industry to offer,
consumer-protective, transparent and competitively priced annuities.” And, he
said, the long-term care insurance market “has not worked well for many years.”
If you don’t like broccoli and you don’t like brussels sprouts, you probably
aren’t going to like a broccoli and brussels sprouts salad. Then again, hope
springs eternal.
Quote of the Day
“We
need not be artists, but we should be able to appreciate the work of artists.
Crafts of every kind, the value of things made by hand, by skilled people who
love to work with wood or clay or stone will develop taste in our people.”
—
Eleanor Roosevelt, “My Day” column, Nov. 5, 1958
Peter
Coy has covered business for nearly 40 years. Follow him on Twitter @petercoy
https://www.nytimes.com/2023/02/17/opinion/retirement-annuity-long-term-care-insurance.html
