Employee Benefit Research Institute
Issue Brief
February 2003
Retiree Health Benefits: Savings Needed to Fund Health Care in Retirement
by Paul Fronstin and Dallas Salisbury
An individual with access to employment-based health benefits in retirement to supplement Medicare will have needed to save a present value of between $37,000-$750,000 to retire at age 65 in 2003. The range is determined by various assumptions regarding age at time of death, premium levels, annual changes to premiums, and out-of-pocket expenses. An individual without access to employment-based health benefits who instead purchases Medigap coverage will have needed to save between $47,000-$1,458,000, to retire at age 65 in 2003. Estimates also are provided for early retirees. The illustrations presented from the model used in this report may underestimate health care expenses in retirement. Expenses for long-term care are not included in this discussion.
This Issue Brief has illustrated the amounts of money a person may need to save by his or her date of retirement in order to pay for insurance premiums and out-of-pocket costs in retirement. The estimates vary with assumptions on insurance premium levels, growth of insurance premiums over time, estimated age at time of death, rates of return on investments, out-of-pocket expenses, and retirement age. These are important factors in determining savings needs, and, just as important, they are uncertain factors.
http://www.ebri.org/pdfs/0203ib.pdf
Comment: Because there are so many variables, this study shows that the amount of supplemental savings needed to fund health care in retirement can be as high as $5,343,000. Although that amount is improbable for most of us, our potential exposure is nonetheless significant. Medicare pays only about one-half of health care costs. Medigap coverage is overpriced and provides only meager benefits. And now employment-based health benefit programs are diminishing in numbers and in the amount of coverage provided. All of this means that the exposure to financial risk of health care costs in retirement is increasing dramatically and is highly unpredictable for most of us.
Exposure to unpredictable major financial risk is reduced by pooling that risk. That is what insurance is all about. At our level of current spending, $1.66 trillion, we have enough to fund a universal pool that would cover comprehensive services for everyone. Distributing that risk to individuals makes no sense since it exposes those with the greatest health care needs to financial ruin.
Shall we adopt a rational approach and establish a comprehensive, universal health care risk pool, or shall we each set aside an extra $5 million in retirement savings to cover our worst case scenario?