Latest / The Demographics Podcast with Fexingo: Aging Populations, Birth Rates, and Economic Impact / How Falling Birth Rates Reshape the Long-Term Care Insurance Industry
Transcript
- Lucas: So we talk a lot on this show about how fewer kids reshape industries from toys to housing to beer. But there's one industry where the math is maybe the most brutal and it doesn't get nearly enough attention: long-term care insurance. Luna: Long-term care insurance. The stuff that pays for nursing homes or in-home care when you're older and can't manage on your own. Yeah, I feel like nobody wants to think about it. Lucas: Exactly. And the reason it's so demographic-sensitive is that it's fundamentally a generational transfer. Younger, healthier people pay premiums into a pool, and that pool pays out when those same people get old and need care. But when birth rates fall, the ratio of premium-payers to claimants shifts dramatically. Luna: So you've got fewer workers funding more retirees. That's the same squeeze we see in Social Security and Medicare, but somehow LTC insurance is even more exposed. Lucas: Far more. Because unlike Social Security, which is mandatory and has some government backing, LTC insurance is voluntary, privately priced, and fully exposed to adverse selection. The people who buy it tend to be the ones who think they'll use it, and they're right. So the claims experience is worse than the general population. Luna: And then the insurers have to raise premiums, which drives away the healthier policyholders, making the pool even sicker, leading to more hikes. It's a classic death spiral. Lucas: That's exactly what we've seen. Let me give you a concrete number. In the early 2000s, there were about 100 insurers actively selling stand-alone LTC policies. Today, that number is down to maybe a dozen. Genworth, which was the biggest player, stopped selling new policies in 2019. They still manage existing policies, but they're not taking on new risk. Luna: And Genworth wasn't a tiny company. They had something like 700,000 policyholders. But the losses were just unsustainable. Lucas: Right. And here's where the falling birth rate part comes in directly. The actuarial models that insurers used in the 1990s assumed a certain ratio of workers to retirees. Back in 1950, there were about 16 workers for every retiree. Today, it's around 3 to 1. By 2050, it's projected to be closer to 2 to 1. Luna: So the pool of potential premium-payers is shrinking relative to the pool of claimants. That means each remaining worker would have to pay dramatically more to keep the system solvent. Lucas: And that's exactly what's happening. We've seen rate increases of 50 to 100 percent on existing policies. Some policyholders have seen their premiums double or even triple over the life of the policy. And because these policies were sold as level-premium—you pay the same amount each year—the sticker shock has been enormous. Luna: Which then feeds the death spiral. People who can't afford the hike drop coverage, leaving a sicker pool. But Lucas, isn't there also a product innovation angle? I've been seeing a lot about hybrid policies that combine life insurance with a long-term care rider. Lucas: That's the main evolution in the market. Instead of a stand-alone LTC policy that you either use or lose, a hybrid policy ties the long-term care benefit to a life insurance policy or an annuity. If you don't end up needing care, your beneficiaries get the death benefit. So the 'use it or lose it' fear goes away. Luna: And that helps with the adverse selection problem, right? Because people who buy hybrids aren't necessarily the ones who think they'll definitely need care. Lucas: Exactly. The pool is more balanced. The biggest seller now is probably OneAmerica, and they've leaned hard into the hybrid model. But even these products aren't cheap. A typical hybrid policy for a 55-year-old couple might cost $3,000 to $5,000 a year, and the benefit pool is capped—say $300,000 total. Luna: And that cap is critical because the actual cost of care is rising fast. A private room in a nursing home now averages over $100,000 a year. So $300,000 might cover three years. If you need longer, you're on your own. Lucas: Which brings us to the state-level experiments. Washington state launched the WA Cares Fund in 2023. It's a mandatory payroll tax of 0.58 percent on all workers, and in exchange, you get a lifetime benefit of up to $36,500 for long-term care. It's not enough to cover full nursing home costs, but it's a start. Luna: And that's a totally different model. Social insurance, voluntary opt-out only if you have private coverage. But $36,500 doesn't go far when care costs triple digits. Lucas: No, it doesn't. But the WA Cares model is being watched closely. California, New York, and Hawaii are all considering similar programs. The logic is that private insurance has largely failed, and the demographic math means it will only get worse. So maybe the government has to step in. Luna: But that raises the same intergenerational question. Younger workers are paying for a benefit they won't use for decades, and they're already squeezed by student debt, housing costs, and a higher cost of living. Lucas: Yeah. And if birth rates keep falling, that burden per worker just grows. I mean, this is the core tension of any pay as you go system in a shrinking population. And it's worth remembering that a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making a show that digs into this kind of detailed demographic math. No ads, no sponsors—just people who find value in understanding how these trends play out. So if walking through the economy with us has made something click, that's the way to keep it going. Luna: Yeah, it's a small group, but it makes a real difference. And it keeps us independent, so we can follow the numbers wherever they lead. Lucas: Exactly. So back to the WA Cares model—one of the criticisms is that the benefit hasn't been adjusted for inflation. $36,500 today might cover a few months of home care. In 30 years, it'll cover maybe a month. So the program's real value erodes unless they index it. Luna: And indexing would require even higher payroll taxes. It's a tough political trade-off. Lucas: It is. And that's why some economists argue for a different approach entirely: self-funding through savings. Instead of buying insurance or paying into a state fund, you accumulate assets that you can draw down if needed. The idea is that with compound returns, a disciplined saver could build a nest egg large enough to cover care costs. Luna: But that assumes you have the income to save. And it assumes you don't need care before you've saved enough. And it assumes market returns cooperate. That's a lot of assumptions. Lucas: It is. And the data shows that most Americans don't have that kind of savings. The Federal Reserve's Survey of Consumer Finances shows that the median retirement account balance for households near retirement is around $200,000. That's not enough to cover a multi-year stay in a nursing home, plus all other living expenses. Luna: So the default for many people ends up being Medicaid, which is the government health insurance for the poor. But to qualify, you have to spend down almost all your assets. It's essentially a catastrophic safety net, not a proactive plan. Lucas: Right. And Medicaid wasn't designed to be the primary long-term care payer, but it has become exactly that. It now covers about 40 percent of all long-term care costs in the U.S. That's a huge fiscal burden, and it's growing as the population ages. Luna: So we have a market that's largely collapsed, a few hybrid products that are expensive, state experiments that are modest, and a reliance on Medicaid that strains state budgets. What's the way forward? Lucas: I think the most realistic path is a mix. A mandatory social insurance layer, like the WA Cares model but with a higher benefit and inflation indexing, funded by a broad payroll tax. On top of that, private hybrid policies for people who can afford them. And then a strong safety net for those who can't. Luna: That sounds a lot like the multi-pillar approach used in countries like Germany and Japan, which have more severe aging demographics than the U.S. Germany has mandatory long-term care insurance that covers about half the cost of care, with private supplements available. Lucas: Exactly. And those countries have birth rates even lower than the U.S.—around 1.5 children per woman versus 1.6 here. So they've already had to confront the math. The U.S. has been slower, partly because our population is younger and we have immigration, which helps the worker to retiree ratio. Luna: But immigration rates have been declining, and birth rates aren't bouncing back. So the window for incremental reform is closing. Lucas: It is. And the insurance industry's experience shows that waiting too long makes solutions more expensive and less effective. The stand-alone LTC market is essentially dead. The hybrid market is growing but still small. And the state experiments are just getting started. Luna: So what should someone listening today actually do? I mean, if they're 40 or 50 and worried about this. Lucas: I think the first step is to understand that relying on family caregivers is becoming less viable. Fewer children means fewer potential caregivers. And those children are more likely to live far away. So planning for paid care is essential. Luna: And that planning might include a hybrid policy if you can afford it, or a dedicated savings account, or even a reverse mortgage on your home. But the key is to have a plan, not just hope it works out. Lucas: Exactly. And the demographic trends are not going to reverse anytime soon. So this is a problem that will only get more acute. The sooner individuals and policymakers confront it, the more options they'll have. Luna: And maybe the most important takeaway is that the numbers are not abstract. Every birth rate statistic translates into a real human question: who will care for you when you're old? And the answer is increasingly uncertain. Lucas: It's a tough topic, but that's why we cover it. Thanks for sticking with us through the numbers.