Morningstar study on long-term care costs gets pushback from think tank

A new Morningstar report warns that long-term care expenses could dramatically undermine the financial readiness of American retirees.

But the study’s conclusions are facing pushback from a Washington-based policy expert, who argues the analysis exaggerates households' actual exposure to those costs.

In "The Overlooked Cost: How Long-Term Services and Supports Impacts Retirement-Income Adequacy," Morningstar researchers Spencer Look and Jack VanDerhei used a proprietary model to simulate the retirement outcomes of American households under two conditions: one that includes long-term services and supports, or LTSS, and another that assumes those costs are fully covered by outside sources.

The findings from the Morningstar Center for Retirement & Policy Studies published last week suggest that the inclusion of LTSS costs increases the share of households projected to deplete their retirement resources from 26 percent to 41 percent.

“The biggest decrease was for single females, with 52% projected to be at risk when LTSS costs are included, compared with 34% without LTSS costs,” the authors wrote.

The report also projects that 43 percent of baby boomers will incur LTSS expenses in retirement. Among those who do, the estimated average present value of lifetime costs ranges from $185,926 for single men to $251,137 for couples. For all households needing LTSS, the conditional mean cost is $242,373.

The researchers also connected longevity risk and long-term care needs, noting that as people live longer, their probability of requiring care increases.

For example, while just 24 percent of men who die at age 75 are expected to incur LTSS costs, that figure climbs to 52 percent among those who die at age 95. Among women, the dispersion of scenarios is even wider – from 27 percent to 60 percent depending on age at death.

But Andrew Biggs, a senior fellow at the American Enterprise Institute, questioned the study’s core assumptions.

“Morningstar’s estimates for the share of seniors who run out of money assumes that all long-term care costs are borne by retirees themselves. That’s just untrue,” Biggs wrote in a commentary published Tuesday.

Citing Congressional Research Service data, Biggs noted that in 2021, seniors paid just 14% of total LTSS costs out of pocket, with the remaining 86% funded through Medicaid, Medicare, private insurance, and other sources.

"Total long-term care costs in 2021 equaled $468 billion. For context, that’s about 14% of seniors’ $3.3 trillion in total incomes that year," he said, referring to the CRS figures.

Analyzing those numbers, he concluded less than 2% of seniors' total incomes were used for out-of-pocket long-term care costs.

“Even if government spending on long-term care were cut by 75%, Morningstar’s household costs would still likely be too high,” he said.

Biggs also took aim at the report's use of private-pay cost data from Genworth’s 2023 Cost of Care Survey, noting that it measures full-pay private rates for long-term care. The assumption that a senior pays full freight for long-term care in later life – without support from discounts, government programs, or private insurance – doesn't apply to the vast majority of older adults in reality, he argued. 

To be fair, the Morningstar report appears to acknowledge the limitations from how it modelled out long-term care costs for households in retirement. 

“These estimates reflect the costs a household would have to pay to avoid spending down to qualify for Medicaid-financed LTSS or otherwise relying on charity,” the authors wrote.

Morningstar’s researchers plan to explore alternative scenarios in future reports, including the potential mitigating effect of long-term care insurance and proposed legislation like the Well-Being Insurance for Seniors to be at Home Act.