Health Care Costs, Taxes, and
the Retirement Decision
Rudolph G. Penner and Richard W. Johnson
The Urban Institute
Presented at the 8th Annual Joint Conference of the
Retirement Research Consortium
Washington, D.C.
August 10, 2006
Rip Van Winkle Simulation

“Fall asleep” in 2000, at age 35

“Wake up” in 2030, at age 65

Taxes and health care costs are much
higher in 2030 than in 2000

For how long must he delay
retirement to receive as much
income as under low-cost conditions?
Six Prototypes



Born in 1965, work continuously from age
30 until they retire
Married couples and single adults
Three income groups




low-income: husband and wife earns 40% of
avg national wage
mod-income: hub earns 95%, wife 70%
high-income: hub earns 150%, wife 70%
Moderate and high-income have 401(k)
Annual Retirement Income at Age 65
(2030) in 2005 Dollars
$70,000
$60,000
$50,000
$40,000
401(k) annuity
Social Security
$30,000
$20,000
$10,000
$0
Low Mod High
Low Mod High
Married Couples
Single Adults
Low-cost scenario assumes tax
burdens remain at 2000 levels
In 2030, use 2000 rates
 Increase tax parameters by the
growth in average wage index

Personal exemption
 Standard deduction
 Exemption amounts for AMT
 Income thresholds that set marginal
rates and taxability of Social Security

High-cost scenario assumes tax
burdens soar as Congress does
nothing to restrain them



More people pay the AMT
More Social Security benefits subject to
tax
Standard deduction, personal exemption,
income thresholds that set marginal tax
rates grow with CPI

Tax brackets creep upward as incomes rise
faster than CPI
High-Tax Scenario Generates Tax Rates
Above 14% for High-Income Retirees
Age-65 Tax Rates, by Income and Tax Scenario,
2030
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
Low Tax
High Tax
Low
Mod High
Married Couples
Low
Mod High
Single Adults
Health Care Costs
Based primarily on imputations from
Medical Expenditure Panel Survey
 Grow to 2030, accounting for
introduction of Medicare Part D
 Low-cost: costs grow between 2000
and 2030 by change in CPI
 High-cost: growth consistent with
intermediate assumptions of
Medicare trustees

In 2030, High- and Moderate-Income
Couples May Spend $15,000 on Health
Care at Age 65, in Today’s Dollars
Out-of-Pocket Health Care Costs, by Income and
Cost Scenario, 2030 ($2005)
$16,000
$14,000
$12,000
$10,000
Low Cost
High Cost
$8,000
$6,000
$4,000
$2,000
$0
Low Mod High
Low Mod High
Married Couples
Single Adults
The High-Cost Scenario Reduces Net
Retirement Income by About 25% for
Moderate-Income Couples
After-Tax Income Net of Out-of-Pocket Health
Care Costs, by Income and Cost Scenario, 2030
2005 Dollars
$60,000
$50,000
$40,000
Low Cost
High Cost
$30,000
$20,000
$10,000
$0
Low Mod High
Married Couples
Low Mod High
Single Adults
Workers Can Increase Retirement
Income by Remaining at Work

Raise Social Security benefits

Limit actuarial reduction of early claiming

Increase 401(k) accumulations

Reduce the period over which 401(k)
benefits must be spread
Retirees Could Receive About As Much
Net Income Under the High-Cost
Scenario By Working an Extra 2.5 Yrs
No. of Years Worker Must Delay Retirement
Beyond 65 to Equalize Net Income
3.0
2.5
2.4
2.5
2.8
2.6
2.0
2.0
1.5
1.0
0.5
0.5
0.0
Low
Mod
High
Married Couples
Low
Mod
High
Single Adults
Our Estimates Likely Overstate
the Impact of Taxes and Health
Care Costs on Retirement
Most workers will likely partly
respond by making do with less
retirement income
 People will experience some tax and
medical cost increases before they
retire, and thus save more
 Rising taxes and health care costs
will not lead to dramatic changes in
retirement
