Regardless of how the numbers are calculated -- and there are a multitude of ways to calculate those numbers -- the cost of health insurance is almost sure to delay retirement for many workers. Very few employees will have the means to easily pay for coverage when employer-provided health insurance concludes.
By Dallas Salisbury
Healthcare worries will keep workers on the job.
Many Americans already report waiting until age 65 to retire in order to be covered by Medicare. Others report working beyond that age so their employer-paid health insurance, in combination with Medicare, will cover most of their health expenses.
A recent study by analysts at the Brookings Institution found that every $1,000 of actual or expected out-of-pocket expenses has the effect of delaying retirement.
And as more workers anticipate taking a single-sum distribution from a defined-benefit or defined-contribution retirement plan, experts are forecasting how much of that distribution might need to be devoted just to health expenses during retirement.
In its 2008 estimate , Fidelity Investments said the average 65-year-old couple would need $225,000 to pay costs not covered by Medicare. The Center for Retirement Research released its 2008 average annuity need for healthcare expenses: $205,000.
The Employee Benefit Research Institute recently updated its estimates as well. EBRI, of which I am president and CEO, provides a spectrum of numbers that relate to the health status of the individual or couple -- with targets determined for various models, since an "average" number will be wrong for those who are not average, which, of course is most of us.
For a couple at 65 with median prescription-drug expenditures who seek a 50 percent chance of having enough money, with no employer involvement, the EBRI estimate is $194,000. That rises to $305,000 for a 90-percent chance of having enough money to cover costs.
Were the couple instead to be in the highest 10 percent of drug spenders, they would need $635,000 to achieve a 90-percent chance of having enough money.
Only 55 today and planning for retirement in a decade? A high-drug-use couple would need $1,064,000 by 2018 to have a 90-percent chance of covering expenses.
Were the retired couple to have access to employer-based coverage, the numbers would change -- further underlining why each worker needs to do a careful assessment of their situation in order to know how much they need to accumulate for retirement.
All of these estimates assume that Medicare will continue to be available at the age of 65 and that Medicare benefit levels will not be reduced -- a risky assumption.
As my prior columns have suggested, Medicare is facing long-term funding challenges. In fact, earlier this month in Washington, former CMS Administrator Gail Wilensky, a health adviser to Sen. John McCain, R-Ariz., advocated upping the age at which individuals can get Medicare to at least 67 and then higher, should the age for full Social Security benefits be upped in the future.
The implications of delaying retirement age on worker savings would be significant.
Moving in the opposite direction, the current proposals of Sen. Barack Obama, D-Ill., include allowing access to Medicare at the age of 55, for a cost. Such a change would likely move actual retirement ages down, instead of up.
McCain proposes the expansion of health-saving accounts to help meet the needs of retiree-health expenses. Recent EBRI estimates show that HSAs could help, but would likely not be sufficient.
Were a 55-year-old couple today to contribute the maximum to an HSA each of the next 10 years, spend nothing from the account and achieve good investment returns, they could accumulate $118,000 by 2018.
And that is the optimum forecast. In reality, most workers with health plans that allow HSAs would likely spend some of the money in the account to pay for current healthcare expenses and the balance would be subject to low rates of returns for a number of years, based upon current HSA arrangements. These factors would lead to lower account balances.
Whether one looks at the proposals of McCain or Obama, the savings needed for health insurance in retirement will increase for most Americans, not decline.
Health insurance is the first-choice employee benefit of workers, and a must for most couples before entering into voluntary retirement. Government-provided health insurance is likely to become less generous in the decades ahead, and much more expensive, particularly for higher-income retirees.
As in Great Britain, supplemental health insurance would likely be part of any system the United States might move to in the future, requiring savings for co-pays to the government program as well as premiums and co-pays for the supplement.
Because of these facts, HR executives will increasingly see changes in worker attitudes towards retirement age, and will also likely see changes in public policy that move likely retirement ages up the age continuum.
As employers continue to expand the availability of one-on-one retirement-planning assistance and/or expanded online tools, workers will better understand the savings they need to maintain their standard-of-living in retirement, including the cost of health insurance -- leading many workers to want to work longer.
Only the lucky minority who have worked a full career for an employer or multi-employer group that provide an adequate defined-benefit annuity, indexed for inflation, or a sufficient defined-contribution plan (think average annual contributions of 20 percent for 35 or 40 years) and fully paid retiree-health insurance, will likely continue to retire ahead of full Social Security and Medicare in the decades ahead, unless they are given no choice.
