The tax code must be updated to protect quality of life for longer-living Americans

Despite research showing Americans eat too much and exercise too little, we are nonetheless living longer lives than any previous generation. Indeed, the growth in life expectancy at birth is stunning: it has jumped from 49 years in 1901 to more than 77 years today.

What’s more, the “average” 65-year-old today can expect to live 17 more years, and everyone expects these longevity increases will continue. Yet Americans are woefully unprepared to meet the costs associated with living longer. According to the Federal Reserve Board, the median balance among those who have a retirement account is $35,200.

Meanwhile, the Employee Benefits Research Institute reports that “America’s elderly face an income shortfall between 2020 and 2030 of at least $400 billion, just in their ability to cover basic living expenses and any expenses associated with an episode of care in a nursing home or from home healthcare.”

A potentially severe and protracted crisis is on the horizon — a crisis so deep and widespread that it could affect virtually every public-policy debate in Washington. It is not hard to imagine millions of retired baby boomers, relying solely on Social Security because they have exhausted their savings, pressing federal lawmakers for help in their final years. The pleas will be hard to ignore and might have to be answered with cuts in other critical areas like defense, transportation and environmental protection, increased taxes or greater government borrowing.

This crisis does not have to be realized, of course. Congress has time, albeit not much, to take some common-sense steps to address this situation. Job one is to enact pension-reform legislation, which remains tied up in conference.

The legislation contains, among things, provisions making permanent the retirement savings provisions in EGTRRA, the Economic Growth and Tax Relief Reconciliation Act. This will continue to encourage workers to boost their long-term savings in tax-qualified arrangements. To be sure, increasing long-term savings remains vital to addressing the financial risks associated with Americans’ increasing longevity.

Congress also needs to address seriously questions about how workers of today will be able to make their savings last a lifetime. The questions have been fueled by, among other things, employers’ shifting away from defined-benefit pension plans, which guarantee lifetime payouts to retirees, to defined-contribution plans, such as 401(k)s. These plans, although well-tailored to a mobile work force, don’t guarantee lifetime income.

A variety of bills introduced in both the House and Senate aim to help restore the guarantees of lifetime income through annuities. More are likely to follow to help people create “personal pensions” through tax incentives for people who turn retirement savings into lifetime income. These efforts also complement provisions in pension reform legislation that make it easier for employers to offer annuities in 401(k) plans.

Meanwhile, Congress also should look into permitting employees in 401(k)s and other defined-contribution plans to allocate on a pre-tax basis a portion of their plan assets to an annuity that guarantees lifetime income.

Addressing Americans’ long-term-care needs through the tax code also will be central to taming the longevity crisis.

More than half of those 85 and older require some form of long-term care. About 19 percent of all senior citizens suffer from some degree of chronic impairment. By 2050, it is estimated that up to 5.4 million seniors will need the services of a nursing home — the most costly form of long-term care — and an additional 2.4 million will require home healthcare.

As more Americans need long-term care, the costs are skyrocketing, averaging approximately $70,000 annually for a private room or about $62,000 annually for a semiprivate room at a nursing home. By 2030, a private room in a nursing home will average $190,000 annually and a semiprivate room will average $167,000.

Clearly, most Americans cannot save enough to cover these high costs on their own. Without long-term-care insurance, they will turn to the already-strained Medicaid system. Incentives are needed to encourage people to take personal responsibility for their potential long-term-care needs through the purchase of long-term-care insurance.

An important first step on this road would be a change to the tax code that would allow for a combination of long-term-care insurance with an annuity contract or a life-insurance policy. Under current law, these two products cannot be combined, even though there is no apparent policy reason for the prohibition. This proposed change — again, under consideration in the pension conference — eliminates an unnecessary obstacle, allowing individuals to save and invest for the future while also making these important retirement security products more adept at meeting seniors’ varying financial needs.

As Congress reviews the code to address issues raised by longer lives, it also should be very wary of any proposal that would reduce the existing incentives to save and invest. What this country does not need are proposals that would diminish the ability of Americans to save for their retirement, especially under the guise of “leveling the playing field.” Reform proposals should not limit an individual’s ability to invest in annuities, the only product specifically designed to protect people against outliving their assets.

Smart, targeted fixes to the code could make the difference between poverty and comfort to millions of future retirees.

Keating, a former governor of Oklahoma, is president and CEO of the American Council of Life Insurers.