Morningstar Magazine - February/March 2014 - (Page 63)

money and earning a living. They have time to continue their education, deepen the field they're already in, or go into a different field to raise their human capital. Kaplan: Outside of raising the Social Security retirement age, what other incentives We need tort reform. This is U.S.-specific, obviously. We have different states with different rules. We can't sell policies across state lines. There are a range of issues that are really adding to the costs of our healthcare delivery that don't have a thing to do with the actual health-care service. "Listen, you can declare a beneficiary for up to 50% of your unused portion toward their health care"? Now, you can give the incentive of helping their heirs. There are different ways to do this, and I'm not saying this is the best solution. All I'm saying is that there are ways to build in incentives. can you give people to work longer who are able to work longer? Kaplan: Yes, but outside of the U.S. health care is an entitlement for most of the world. It's Falk: One of the major topics is health care. What if the nature of how people are responsible for paying for their health care changed? This is a very involved topic, and I'm oversimplifying it, but we need to connect the user and payer of services more directly. So, if I need to have knee surgery, I'm responsible for more of the cost of the knee surgery. Then as you get older, as you require more health services, you would have to work longer to generate the income to pay for them. You pay for it through your taxes. Annuitizing Retirement completely separated from the responsibility. When we factor in what those costs are-and we know they can be extraordinary-then the incentives change. You're not just working longer to generate more savings. You're also working longer to cover your responsibility of future health costs. The big issue is responsibility and shifting away from an entitlement mentality. Kaplan: But aren't we currently moving further apart the payment of services and the Kaplan: We're talking about the government side of social insurance. What about from the Falk: Right. So, if you think of it that way, it is an indirect entitlement; you've made a pledge to pay for it without knowing the expense. If, say, Canadians are going to age similarly to Americans and you have these rising costs to economic growth, then it's just going to filter into the tax system. One way or another, we're all going to pay, so the question is, do we want to know what we're going to pay? Do we want control over what we're going to pay? In the last six months of one's life in the U.S., upward of more than 50% of the person's lifetime medical costs are spent. Why is that? Because these are the least healthy of your days. We know the wonderful things the medical community can do to keep us alive, but they don't necessarily add to quality of life. And it's very, very expensive. private-sector side, where we've seen this massive transition from defined benefit to defined contribution? That seems to be exactly the opposite of what we need. If we're going to have a population of a lot of older people, then it seems that we're going to need longevity risk pooling that's characteristic of defined-benefit plans. Falk: It's always purchasable, though, Paul. People can go out and buy an annuity contract. In essence, it's the same thing. It may not be as cheap or as good, but it's interesting. If you've got a pool of people from all over buying into an annuity contract versus employees of one company who have a defined benefit, we can ask the question, who has less counterparty risk? We know businesses fail. So can insurance companies. But we can argue maybe an insurance company is a little safer. consumption of those services? Falk: We are. We're going the wrong direction. But I have to appreciate the cost of health-care services today is extraordinarily high, and it's extraordinarily high for reasons that are business issues that really shouldn't be having an impact on the costs the way they have. The Cleveland Clinic estimates upward of 30% of every dollar spent on health care is administrative-related. Think about that for a second. Almost a third is for administration, because of the different hands in the pot and and the billing and administration. I tossed out an idea a few years ago. What if, as part of all health-care policies, individuals had to sign an end-of-life declaration. It's revocable at any time, but they have to declare to either remain plugged in or to be unplugged. The potential savings would be massive and aren't even being tapped. And there are ways to incent this. For example, if you have a health-care policy when you're older that has some sort of a limit, right? Let's say it has a half-million-dollar limit. Once you reach age 80, for example, that's your spending cap for the rest of your life. But here's the interesting thing. What if we say to people, If, for example, somebody works to the age of 70, they could then purchase an annuity that will not begin paying out until they're 80-plus. These are sometimes known as "advanced life delayed annuities." They're essentially self-insuring for 10-plus years before the annuity starts paying out and they get that longevity protection. This is certainly achievable by people in a definedcontribution format. Defined contribution has gotten a horrible name, and the reason is because we sort of set people up to fail. We said, "Do you want to participate, yes or no?" Well, who wants to global.morningstar.com/Morningstarmagazine 63 http://global.morningstar.com/Morningstarmagazine

Table of Contents for the Digital Edition of Morningstar Magazine - February/March 2014

Morningstar Magazine - February/March 2014
Contents
Contributors
Letter From the Editor
Preparing for the Next 50 Years
Morningstar Managers of the Year
Fixing the Trust Deficit
Rethinking the Path to Retirement
Trends
Same Old, Same Old
Global Briefs
The Economic Implications of an Older World
Banking on Performance
Is the Affordable Care Act Healing Health Care’s Woes?70
Baxter Has a Positive Prognosis
Leading Fidelity’s Charge for RIAs
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
Moving the Goal Post

Morningstar Magazine - February/March 2014