We Americans face lots of choices regarding our financial well-being. Instead of guaranteed pensions, most of us now must choose among an array of 401k options. Instead of national health insurance that covers everyone, we each must choose which private plan best suits our needs. As we age, we must figure out if we need an insurance policy to supplement our Medicare benefits, and a long-term care policy in case we become demented or otherwise disabled. And, we might want to think about a reverse mortgage.
Such decisions are difficult for anyone, but overwhelmingly so for people whose ability to exercise sound judgment is declining.
This emphasis on choice might actually put some older Americans in jeopardy, says Sewin Chan, an associate professor of public policy at New York University who studies the economics of aging and retirement.
"Older people have a lot of complicated decisions to make," she said. "What we don't know much about is how declines in cognitive ability affect these decisions."
Chan described how she and her husband recently had to decide which of 10 insurance plans would be best for their family. "So I built a spreadsheet," she said. "I came to a decision, but I'm not sure it was the best decision, and I have a Ph.D. in economics."
So how are older Americans supposed to make smart, well-informed decisions regarding their finances? In a study she co-authored last year in Health Affairs, Chan found that people who scored low in tests of cognitive and math ability were significantly less likely to purchase a supplemental Medicare insurance plan, especially if they were poor and chronically ill — in other words, if they were precisely the type of people most in need of supplemental Medicare insurance.
The tests did not measure IQ or general intelligence. Rather, the test of cognitive ability involved remembering as many words as possible from a list of 10 — a common test used to measure memory decline — and the math test involved three questions, such as, if you start with $100 and the interest rate is 5 percent, how much will you earn in 5 years?*
Research has shown that people who don't do well on such tests make worse savings and investment choices, Chan said, which is why the emphasis on choice may not be the best system for older people.
"If you have a national health care system, there are no choices to make," Chan said. "The health care system we have imposes lots of choices. In other countries, providing choices doesn't play as large a role in public discourse. People are more concerned about whether everyone can get care."
Chan believes it might be a better idea to guide people into sound choices regarding investments, insurance and other financial concerns, and then allow them to opt out and choose something different if that's what they want.
"I think we've moved a little too far in the direction of choice," she said. "If we want to preserve choice for people who are able to make good decisions, that's great, but I think we need to provide more help for people who need help."
* 5 percent on $100 compounded annually will give you $127.62 after five years (5 percent interest on $100 results in $105 after one year; then 5 percent of $105 results in $110.25 after the second year, etc.)
Tom Valeo writes about health matters. He can be reached at [email protected]