Wednesday, March 6, 2013
In a first rate article published recently on ssrn, Alison Hoffman and Howell Jackson present detailed empirical findings about the expectations people have about likely spending on healthcare in retirement. The issue is critically important, as Medicare pays for only about 60% of beneficiaries' healthcare coses, and this percentage is continuing to decline. Hoffman and Jackson had expected to discover that Americans as a general rule underestimated likely health care costs. Instead what they found was far more nuanced.
Women, for example, are much more likely than men to underestimate likely average expenditures in comparison to experts' assessments--yet women are likely to face expenditures that are significantly higher than those of men. Younger people are more likely to underestimate expenditures--despite rising healthcare costs that may portend higher expenditures for them than for current retirees. Moreover, people in general are quite likely to underestimate the degree of uncertainty there is about estimates of future expenditures and to distinguish among sources of uncertainty such as individual needs, changes in overall healthcare costs, or changes in Medicare and Medicaid policy. Another concern raised by the data is that some people may be significantly overestimating expenditures as a lump sum (in comparison to monthly outlays) and as a result becoming discouraged about their likely ability to achieve sufficient savings.
Based on these findings, Hoffman and Jackson suggest increasing efforts to foster financial literacy, particularly for women. They also suggest regulatory interventions to increase premium transparency and the availablity of low-risk insurance options as a way to buffer uncertainty. The article is a very nice example of how empirical research can question received assumptions--such as tha underestimations are uniform--in ways that might helpfully inform public policy.