Options and Alternatives to Fund Retiree Health Care Expenditures
The percentage of employers offering health benefits to retirees has been declining in the United States for many years with both early retirees and Medicare-eligible retirees experiencing a decline in coverage. Even when benefits are offered, premiums are higher, out-of-pocket expenses are rising, and eligibility requirements are becoming increasingly stringent. The combination of the erosion of retiree health benefits and the fact that the Medicare program is facing a financing crisis means that many future retirees will pay a greater share of insurance premiums and will bear an increasing burden of costs when health care services are needed. It has been estimated that an individual who retires at age 65 in 2005 and lives to age 90 will need $143,000 in savings to pay for Medicare Part B premiums and employment-based health insurance to supplement Medicare. The individual will need assets of $210,000 if he or she wants to also cover about $1,800 in out-of-pocket expenses each year. Such figures could easily be higher depending on the rate of health care inflation. In a recent survey of TIAA-CREF retirement plan participants, 77% expressed concern about being able to meet their medical expenses during retirement and only 9% have estimated how much they will need to meet these future expenses. This paper examines a number of mechanisms that employers and employees can use to pre-fund retiree health benefit expenses during work years. While there are obvious benefits to pre-funding retiree health benefits through existing tax-preferred vehicles while an individual is employed, existing options are in large part inadequate to solely fully fund retiree health benefits.
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