For employees, today’s healthcare environment is a little like squeezing a balloon: when health insurance premiums are affordable, then the side with the out-of-pocket costs inflates. If that side is more reasonable, monthly premiums expand. Either way, health care coverage and insurance costs are likely to drain the budgets of those they are designed to protect.
For many Americans, Medicare may seem like a beacon of light that will rescue them from financial shipwreck once they reach age 65. As an HR professional, perhaps you understand that the beacon isn’t as bright as many believe it to be; in truth, retirement may be only the beginning of the troubles.
Timothy Lane is Managing Director of TIAA Health, as well as President and CEO of Emeriti Retirement Health, a nonprofit consortium that provides a defined contribution retiree healthcare solution for academic, cultural and public sector organizations. He is concerned that people just don’t understand the costs they face.
“When the time comes to start thinking about retirement, it is often the first time individuals actually learn about the retiree healthcare policies of their employer and the hard facts about Medicare—how it works, what it does and doesn’t cover—and other supplemental coverage and healthcare needs,” he says.
Recent findings from Voya Financial align with Lane’s perspective, finding that the real cost of health care in retirement isn’t on the radar screens of most Americans. The white paper covering Voya’s findings, “Playing the Long Game: Understanding How Health Care Costs Can Impact Your Retirement Readiness,” shows that just 14% of those surveyed had calculated the cost of healthcare in retirement.
“There is much uncertainty among consumers about the future of retirement and rising healthcare costs,” said James Nichols, senior vice president of Voya’s Customer Solutions Group. “Americans need to understand the impact that healthcare costs can have on their overall financial security—both today and in retirement—and they need to be aware of the savings tools available to them to calculate their needs.”
Significant Costs, Significant Worries
While they are unclear about how much healthcare will actually cost in retirement, today’s workers worry about it. Earlier Voya research indicated that 41% of Americans rank healthcare as the expense they are most worried about. When asked to estimate how much their costs would be in retirement, 66% were significantly low, estimating $100,000 or less.
In reality, according to the Employee Benefit Research Institute, a 65-year-old man would need $127,000 in savings and a 65-year-old woman would need $143,000 in savings, for a total of $270,000, to give them 90% certainty of having enough savings to cover their retirement health care expenses.
Simply put, retiree healthcare costs are another facet of financial wellness—something many employers today see the need to address. Employees worrying about these future costs translate into workforce problems, similar to the impact of worrying about today’s budget. In fact, these future costs may keep people in the workforce past their ideal retirement date. “Without access to affordable retiree healthcare,” says Lane, “retirement decisions may be delayed—creating deeper challenges associated with workforce renewal and management. With a projected average of $265,000 in healthcare costs above Medicare for a couple at age 65 for their life expectancy, employee concerns about their ability to retire are real.”
Emeriti works within a system that still sometimes pays for the healthcare of retirees—public and private higher education and education-related nonprofits. As was the case in the last decades of the 20th century for corporate employers, continuing to fund retiree health expenses is becoming less and less sustainable in education circles.
This reality prompted the search for solutions, and ultimately led to the development of the Retirement Health Savings Program (RHSP). The RHSP is an employer-funded DC program, which may also allow after-tax employees contributions. Lessons learned here could ultimately be impactful in a corporate environment.
“With an aging workforce, longevity gains and rising healthcare costs, future promises to pay for some or all of the cost of retiree health insurance become unsustainable,” Lane says. “In addition, accounting rule changes have required both private and public employers to recognize the long-term unfunded liabilities for these promised benefits on their financial statements. As a result, the defined benefit approach to retiree healthcare benefits has slowly unraveled, leaving many institutions looking for cost-efficient, sustainable retiree health alternatives.
“The RHSP provides a tax-efficient savings approach that can increase the value of the employer’s benefit spend—offering up to 50% more value in some cases—while giving retirees tax-free money to use for medical expenses in retirement.”
Education Can Help Them Prepare
If finding better ways to help employees fund their future retiree health costs is on your fall agenda, education may be the key. Consider hosting brown bag sessions for employees who are approaching retirement, focusing on these important topics:
- The real costs of health care and insurance in retirement, including available tools that can forecast these costs. A representative from your health insurance provider may be willing to participate.
- Education about Medicare, such as the different components (Parts A, B, etc.), what each covers and what each currently costs.
- Other sources of retirement income, like part time jobs, and how Social Security income could be affected.
- How Social Security income is impacted by taking it early or delaying it.
- How the current insurance plans work; for example, the real cost of going outside the network for services.
Perhaps in the near future health insurance issues in the United States will be a thing of the past. Until then, this kind of education can help employees prepare for the future with confidence.