EBRI ,-,, Introduction * 46 9 2 References benefit) The Potential Theoc development aforSection Long-Term105(h) of Care a market Insur trustance for (a as medical priv anate Employee expenditure long-term Benefitcaacc re ount) insurance are long-ter_n care coverage. To facilitate discussion about employer-provided marginal tax rate. Tax base broadening has already limited retirement income pool to include younger, healthier populations' subsidizing the current cost associated with particular workers, these trusts are not intended for employee offers the potential to pool risk and reduce public expenditures for long-term long-term of savings, older suggesting participants. care insurance that Economies as the anlegislative employee of scalebenefit, process in themight this administration not section be inclined offers of group two to Andrews, Emily S. and Deborah J. Chollet, April 1987. "Future Sources of capital The accumulation potentialeither. for achieving Use of anywidespread of these trusts long-term by employers care insurance may be care. To realize this potential, the number of covered persons must represent general insurance either extend approaches may also or necessarily to reduce structuring cost.maint The LTC ainadvantages insurance tax preferences of on marketing employee for benefit. current to groups, 2or and retiree Table I Table 2 Retirement Income: Whither the Baby Boom." Presented at the best-suited coverage a broad portion among to funding future of the pop elderly auldefined ation.is aservice Onestrong way benefit, toargument ensure something that for fostering a broad thatspectrum employers long-term of insurers' benefits. experience Lower marginal with employer tax ratesgroup may products, lower employee make employers incentives anfor obvious more might people care as wish have conference antolong-term employee avoid on in care benefit. designing Socialinsurance Securit aLong-term long-term y is ato nd care encourage care Private coverage plan Pensions: employers for retirees. among to Providing retirees provide 3 that for the The primary distinction is whether the plan is "outside-funded" target for a group long-term care insurance product. Nevertheless, very few deferred nonwage compensation, especially if real income of the nonelderly RETIREE HEALTH INSURANCE BENEFITS a continues to decline. PERCENT OF FUTURE RETIREE FAMILIES insurance as an employee benefit. would beRetirement as common as in pension the 21stbenefits Century,or employer-sponsored Institute for Law health and Economics, insurance employer group products have been developed. (capital accumulation to purchase the benefit in retirement is separate from AMONG CUWITH RRENT PENSION ELDERLY INCOME BY FAMAT ILY AGE INCOME, 67 1984 University of Pennsylvania, held in Washington, D.C. would represent An alternative a substantial to outside-funding improvement anonemployee the current long-term holding care of benefit such the insurance plan) or "inside-funded" (capital accumulation occurs within the AND AVERAGE PENSION INCOME IN CONSTANT 1985 DOLLARS: coverage is inside-funding: Employer-provided among the elderly offering benefits andemployees might such substantially asa pensions long-term and exceed care health plan the insur cover that ance ageoffers hthat ave insurance plan). The definition of plan beneficiaries, the benefits covered, Employers and Income Security in Retirement Preferences among employees for more deferred nonwage compensation proven could beeffective achieved MICROSIMULATION by at individu providingal purchases. aPROJECTIONS ctive workers BY 1979 healthAGE insurance COHORT a and retirees current Bureau ofcoverage Labor Statistics. and is entry-age 1986. priced "Employee(that Benefits is, priced in Medium at the and discounted Large how benefits are triggered, and limits on coverage are factors that affect the could develop, however, as the baby-boom ages and the average age of the labor All Elderly Elderly With Retiree Health Benefits present retirementFirms, value income 1985." of security expected U.S. Department inlifetime the formrisk). ofofLabor. pensions Because Bulletin and entry-age post-retirement 2262. (July). pricing medical would cost force ofrises. the plan Changing and, potentially, demographics the couldmagnitude bring about of potential a new focus employeron The role of employers in assuring retirement income security is benefits. result in There plan Without are premiums athese number that benefits ofexceeded competing the ryounger ate factors of participants' health thatinsur make ancethe immediate coverage likelihood risk would of of liability. These details, however, are beyond the scope of this paper. substantial. retirement benefits In 1984,that 34 percent would not of people have occurred over age 65 otherwise. reported income This may from be a Percent Cumulative needing Chollet, prob achieving ably long-term Deborah bethis far potential less J. care Forthcoming. andservices, uncertain. the economic Financin_ capital A security potential would The Elderly's ofbarrier accumulate many retired Health is inside employer persons Care:theconcern would plan exacerbated as more individuals experience providing1979 chroni ABe cCohort care to their pension. Among higher--income elderly (those with family income at twice the Within Percent be oversubst the antially unfundedmore and uncertain. accruing liability of post-retirement medical benefits. (called parents Private and inside grandparents. buildup) Choice andthroughout Public Policy. all or Washington most of workers' D.C.: Employee pre-retirement Benefit An "outside-funded" long-term care insurance plan might be an poverty level or more), 43 percent reported pension income. For a significant Research Institute. Number Cumulative Number Income of All 25-34 35-44 45-54 55-64 years. Another Atisretirement, the feasibility participants for who emplhad oyersbought and coverage employees earlier to in consider their number of elderly, private and public pension plans provide a substantial employer-sponsored capital accumulation plan (for example, a supplemental Family Income (millions) Percent (millions) Group Recipients worklives restructuring The would development employee continue compensation of ato priv pay atepackages the insurance sameto lower include market premium--less long-term for long-term carethan care the has defined-contribution pension) with access to a group long-term care insurance portion of their total retirement income. Among elderly couples and Percent with been hindered by conceptual problems and a lack of information that affects discounted insurance. , 1987. expected It "Fin is ancing value assumedof Retirement that benefits unless Today afterthere and retirement. Tomorrow: are changes AnTheinside-funded in Prospect producti for vity, plan individuals reporting private pension income in 1984, 47 percent received 20 policy at retirement. Assets to purchase long-term care in retirement would America's Worker," in America in Transition: Benefits for the pension income 63 61 57 48 could both employers supply be offered areandnotdemand. tolikely workersActu to at aadd rial theadditional point data of to retirement benefits; estimate risk, nor (as are is costs Alaska's theyandlikely predict publicto percent accumulateor more separately of theirfrom totaltheincome insurance from one plan, or more and private the rate pensions; of asset 12 THE FEASIBILITY OF EMPLOYER-PROVIDED Total 26.1 (i00.0) 6.3 24.1 (i00.0) consumer employee consider Future. programs plan); behavior premiums, Fr that aare nk might M. not McArdle however, increase readily (ed.) would financial available. Washington, be higher liability. Public D.C.: than(and ifEmployee public-sector) the planBenefit were accumulation could be independent of increases in the group plan cost. percent received half or more of their total income from private pensions. Research Institute. LONG-TERM CARE INSURANCE marketed to workers before retirement. reluctance to acknowledge the cost of long-term care, as well as widespread Public pensions (which commonly are automatically indexed after retirement) Employer and employee contributions to the cash accumulation plan, however, $0 - $9,999 9.2 35.4 1.3 13.8 20.3 Average income misinformation The cost about of existing paying for Medicare promises coverage of health for long-term care can care, be staggering. have also could are an beeventargeted more important to allow source retirees of income to fully amongor elderly substantially recipients. pay the In among recipients contributed Many firms and In principle, offering to Robert the B. absence post-retirement Friedl employers aof nd.private could Forthcoming. medical oroffer public benefits this "Employer financing. typetoofcurrent Financing benefitretirees, either of ashave an 1984, 75 percent of elderly couples and individuals reporting public pension projected premium. At retirement, the group insurance could be priced in at $I0,000-$19,999 Long-Term Care." 8.8 in Advances 68.9 in Health 2.5Economics 28.7 and Health Services 60.3 not (dollars prefunded in thousands): and may have an unfunded liability in excess of the value of the insured or self-funded plan, analogous to their options in financing health income derived 20 percent or more of their total income from public pensions, least two ways: on a "term" basis (increasing with retiree age and risk), or Statement of firm's assets. Research. The Richard Department M. Scheffler of Laborandestimated Louis F. that Rossiter based(eds.) on theJAIworkforce Press. benefits.OverIn practice, the past however, five yeaemployers rs, however, might private find self-funding insurer very interest in on and an35entry-age percent basis reported (reflecting half orthe more present of their value total of theincome expectedfrom costpublic over $20,000--$29,999 4.3 85.2 1.3 31.7 81.7 munattractive, age arketing Married 40 or coverage older couples ifinit for 1983, impeded long-term the unfunded their care ability has liability grown.towasalter Most $98.1 major orbillion. terminate health Firms insurers their are pensions the retiree's (Grad, expected 1985). life). Purchasing a plan that is priced according Robert B. Friedland Grad Susan. 1985. Income of the Population 55 and Over, 1984. U.S. are involvement likely now toeither seek in the wma arketing ysplan. to either Employers or testing avoidwith increasing a long an -insured term their care planunfunded product. might beliability better One recent able or toentry age is equivalent to the employee initiating an inside-funded plan at Research Associate $30,000-$39,999 1.9 93.5 0.6 29.7 90.7 reduce the continuation of accruing liabilities for retiree benefits. survey to retirement. define Total of Depatheir rtment insurance contributions oftradeHealth association to the and premium $ members Human 13.0 (containing Services. indic $ 10.4 ates their thSoci a$t 8.8 alliability at le Security ast $ 7.1 for 13 More than half of workers age 25 to 64 participate in an Administration Publication Number 13-11871. the benefit) and to negotiate continuation of coverage for workers and insurers are currently selling long-term care policies of some type, and employer-based pension plan. Although the rate of pension plan participation $40,000-$49,999 0.8 95.7 0.3 34.2 95.2 Defined benefit pension 9.0 7.9 7.1 6.5 another retirees Microsimulation 15 should expecttheytowish do pro so tojthis ections terminate year of the (HIAA, plan. pension 1986). recipiency Estimates of among the market future An outside-funded plan would offer employers one primary advantage: among workers is several points lower than before the economic recession of pl Heaalth ce the Insurance number Associ of insurers ation of at Ameri 60, ca. with a1986. bout 200,000 "The Stapolicies te of Private written Long (Lane, retirees indicates that both the proportion of elderly receiving pension the they early could 1980s avoid (52 liability percent for in 198 increases 5, compared in the to nearly cost of56the percent long-term in 1979), care $50,00 + i.i I00.0 0.3 26.6 I00.0 1986). benefits Term Anandinside-funded the Care ave Insur rageance: real long-term income Resultscare provided From benefit A byNational pensions would offer Survey." may employees grow,Rese even archseveral if And benefit. The full indexation of retiree health liability associated with employer-based pension plans are expected to remain important as an employee Statistical Bulletin 5-86 (November). pensionDefined coverage contribution rates among pension current workers9.9remain the 7.9 same. (Chollet, 6.1 1987; 4.4 advantages over an outside-funded plan. First, the plan would provide current benefit conventional and retiree source of health retirement plans that income define amongbenefits future inretirees terms of(Chollet, covered Hearing before the Andrews and Chollet, 1987). This suggests that employers and workers may have coverage;Thealthough long-termthe probability care insurance of needing market suchis coverage currently is low dominated for young by services forthcoming) poses . a critical problem for employers that they would presumably Source: Preliminary EBRI tabulations of the Survey of Income and Program individual Kane, some latitude Robert products L.,inand restructuring Rosalie marketed A. Kane. primarily retirement 1985. to benefits "Athe Will elderly. toward And A Way: insurance Long-term What benefits care employees, it does have some value. Second, employees' ability to continue want to avoid in devising a long-term care insurance plan. Employers may, in Participation United (SIPP),States WavesHouse 2 through of Representatives 5 (U.S. Department of Commerce, without Singlejeopardizing Americans individuals Cancurrent Learn levels Aboutof retirement Long-Term income. Care From Canada." Rand purchasing insurance products the planareafter almostretirement without exception is a surerindemnity prospect,plasince ns thathe t payprice a fact, look Employer-sponsored to an "outside-funding" health insurance approachbenefits like that for retirees described have herealso to Bureau of the Census). Publication N-2154-HJK. would fixed dollar be substantially amount per lower dayCommittee forforeach long-time onday Waysspent and participants Means in a nursingthanhome it would or for beeach if become finance an post-retirement important and health fairly insur common ance employee for future benefit. retirees,In if 198they 5, 84arepercent Subcommittee on Health Total 9.0 6.8 6.9 5.3 the coverage were initially purchased at retirement. day of Even home assuming health care. that within-industry Policies commonly pension require plan acover waiting age raperiod tes among to of private sector workers in medium and large establishments in the United required to disclose and/or fund the liability accruing for their plans. a Includes persons age 65 or older with no earnings who reported health Kane, workersRosalie show A. no growth 1986. over "Issuesa forty-year in The Delivery simulation Of Long-Term period, Care future Services retirees qualify for benefits and a hospitalization to trigger benefits. Indemnity Outside States (gener funding ally est might ablishments also facilitate that employ employers 250 workersoffering or more)tohadretirees health insurance coverage from a current March or past 31, employer 1987 at any time during the year. are amounts more Defined For in are likely generally the workers benefit toUnited havpension ewho notincome States" indexed terminate fromfor (unpublished) a employment pension inflation, 7.2 planand before Paper than 6.0 benefits current retiring, delivered may 5.6 retirees, be however, at limited 5.1 and the insur coordinated ance plor ansalternative that continued plans tobenefits finance acute after andretirement long-term acare. t age Even 65.1if to to three have U.S.-Canadian higher or four avyears. erage Export real pension Group Meeting income on thanPolicies today's for recipients Midlife (see and Older Table portability may be more difficult in an inside-funded plan, since not all Although the employer many were employers liable may for hguaranteeing ave initiated access retireeto health a group benefits long-termrather care Women, Washington, D.C. 2). InDefined part, contribution this trend can pension be explained by6.9the longer5.1tenure of4.8 young 3.3 employers would offer a long-term care insurance plan or offer the same plan. casually, as a presumed low-cost alternative to enhanced pension benefits, plan when participating workers retired, that obligation might be met in an workers These in a post-ERISA types of workforce, insurance compared products toreflect workers insurers' now retiring consider . Most able of However, portability might be facilitated by allowing terminated employees the retiree health plans now provide a valuable real retirement income expanding private insurance market for long term care by negotiating an this growth, however, results from the greater opportunity of young workers to Kennell, concern option toDavid about buy L., into moral andthehazard. John planF. or Shiels. The to buy potential 1986. conversion Summary insurer coverage of Assumptions cost from resulting theforsamefrom or supplement. For low-income retirees, the value of their retiree health agreement with one or more insurance carriers. another insurance carrier. vest informain l PRISM sever caregivers alSimul defined ation substit . contribution uting Final Report formapension l, Submitted covered plans services and to the from Employee is increase substantial, Benefit in the benefits (automatically indexed to the rising cost of health care) can exceed Research Institute (mimeo). although labor force experience participation from of otherwomencountries . (The microsimulation suggest that relatively results presented little Source: Employee Benefit Research Institute. Preliminary results from the the amount An ofoutside-funded their pension benefit type ofover plantime. would also offer employees some here substitution assume Similar might continuation to an in outside-funded fact of occur. the longer Countries plan, inside-funded defined-benefit that have plans added vesting might long-term face standards csome are Pension and Retirement Income Simulation Model (PRISM) (See Chollet, advantages. First, if such a plan were more acceptable to employers, access Lane, Larry 1987).F. 1986. "Paying for Long Term Care: Private Insurance coverage difficulties allowed before to their in tax obtaining national reformhealth taxand,qualification, insurance, as a result, have simply seenmayminim because understate al substitution thereeventual is of no to long-term Among current care cover retire agees would age 65beor aover, more atwidespre least a24 d percent benefit.have Second, health formal precedent defined-contribution for Products for inform employer-sponsored alare pension care Coming(Kane income ontoand long-term among the Kane,Market future care 1985; retirees. insurance atKane, an )1986). Accelerating benefits. Nevertheless, Although Rate." insurance benefits from a past employer to supplement Medicare (See Table i). capital accumulation plans offer portability that is more difficult in other Retirement Plannin K (Summer), pp. 8-10. U.S. acurrent A insurers description law would have of focused allow the employers onbase-case limiting toPRISM their deducteassumptions xposure premiumby payments, offering underlying unindexed employer these Although retiree health insurance benefits are more common among pension types of plans. However, such plans would place employees at risk for any microsimulation indemnity contributions Inplans 1985and results th doll /or atars, plan payappears abenefits distributions veragein:pension only Kennel could after income andbe hospitalization, Shiels, among taxablemarried-couple 1986. as personal and then income retirees for if a short-fall between accumulated assets and the price of long-term care coverage recipients, a significant number of elderly without pension income also report U.S. Department of Labor. 1986. "Employer-Sponsored Retiree Health in limited the youngest (although cohort generallysimulsufficient) ated with pensions period of istime. expected to rise more than coverage at retirement. included substantial nonmedical, personal care services. health insurance benefits from a past employer. Insurance" (mimeo). Pension and Welfare Benefits Administration, Office 83 percent, to $13,000 compared with $7,100 among couples retiring today. of Policy and Research. Among single The Employees' pricing retirees, rights of these aver toage first-gener thepension plan's ationincome inside insurance isbuildup projected products in to the reflects rise eventatthe ofa The Outside success fundingof ofemployer a retireepension insurance plans planinhasfacilitating little or noretirement precedent somewhat slower rate, from $5,300 among single workers now retiring to $9,000 fact bankruptcy that they reorganization are marketedor primarily merger might to retirees also be or difficult people who to resolve; are close this to in saving, employee as well benefits, as employers' although established it borrowsposition heavily infrom financing the concept health of carea among is notthenow youngest an issue cohortforof retiree single retirees health . plans, since benefits are almost retirement age, and marketed as individual (rather than group) products. adefined mong workers contribution and retirees, pension suggest plan orthat cash-deferred employer plasavings ns mightplan. also offer However, an universally financed pay-as-you-go. In the event of insurer bankruptcy, Premiums are high, reflecting the greater imminent risk of long-term care need excellent opportunity for workers to finance the expense of long-term care employers who would develop a plan restricting use of distributions to payment The prevalence and income distribution of retirees with employers might still be liable for providing long-term care insurance among an older population. Coverage sold to a younger population would offer during of long-term their higher-income care insurance working premiumsyears. or other The spe expenses cification related of su tochlong-term a plan, employer-sponsored The views expressed pension and in this health statement insurance are sobenefits lely thoseisof a favorable coverage, or for paying claims incurred but not paid by the insurance plan. the opportunity to average individual risk over a longer period of years, however, care may is facelikely difficulty to be with critical tax qualification, to its acceptability since theto tax employers. code doesMost not the author and they should not be attributed to the reducing indicationtheofpresent the potential value of for expected employer-sponsored long-term care long-term cost and, care therefore, insurance the . now employers explicitly who would provideconsider for restricted-use adopting a plan capital to assist accumulain tion. financing long-term Employee Benefit Research Institute, its officers, annual premium. This is the premise of whole or universal life insurance, If employer-sponsored long-term care insurance had emerged parallel with care may strongly resist any expansion of unfunded liability for retiree trustees, sponsors, or other staff. compared 3At leasttoone termemployer insurancehasforused thatSection risk. 105(h) based on an IRS letter ruling retiree health benefits. health benefits supplemental to an employer pension, perhaps 19 An outside-funded plan as described here would be a significant to establish a tax-exempt "medical expenditure account" to finance health percent to 24 percent of today's elderly may have had access to long-term care departure from employers using a 501(c)(9) trust (a voluntary employee benefit coverage insurance inbenefits retirement--including for current workers many low-in and cretirees. ome retirees. While 4 105(h) plans have The sale of long-term care insurance to individuals rather than groups StructurinK association, LonK-Term or VEBA) Care to finance Insurance a promised as an Employee long-termBenefit care benefit in anot lso been contributes used widely to or its atcost. all toA fund groupaccrued productliability reduces for thefuture likelihood benefits, of retirement. Despite tax code restrictions that strongly discourage employers adverse selection and lowers marketing costs; it may also broaden the risk employee Pro benefit jectionsconsultants of future have pension suggested recipiency that suggest these plans the potential may be useful for the for from using Several VEBAs employers to fund retiree (including healththeinsurance federal liability government)of any havetype, expressed these development of long-term care insurance as an employer sponsored benefit. that purpose since unused balances can be rolled over to subsequent years--a interest trusts mayin be providing poorly asuited long-term to the carekind benefit of long-term for retirees, care few insurance (perhaps benefit only •Hfeature owever, This statement that the is current obviously summarizes political critical Deborah climto ate J.capital may Chollet not accumulation. and be well Robertsuited However, B. Friedland, for 105(h) these one: the state of Alaska) offer a plan to current retirees. These first employers may wish to provide. VEBAs are not structured as employee-owned changes. Recent tax reform has broadened the tax base and lowered the accounts may be poorly suited for funding benefits which may not be paid for a "Employer Financing of Long-Term Care," in Advances in Health Economics and long-term care plans are likely to serve as models for future plans and may capital accumulation accounts: employer contributions to a VEBA are not Health substantial Servicesnumber Research, of years, Richard sinceM.employer Schefflercontributions and Louis F. cannot Rossiter be deducted (eds.) affect associated employer with and particular employee opinions employees,about and what workers constitutes who terminate appropriate employment _Estimate as a businessis expense based until on distributions preliminary aretabulations made from the of account retirees in payment with JAI beforePress. retirement Charlescannot Betley withdraw of EBRI funds provided from the inv VEBA. aluable Although researchemployer and progr employee of participants' amming -provided assistance. health healthcarebenefits bills. in the Survey of Income and Program IEBRI contributions tabulation to either of thea 401(h) 1985 Employee trust (designed Benefit asSurvey subsidiary (U.S.toDepartment the pension of Participation (waves 2 through 5). For more discussion on this observation Labor, Bureau of Labor Statistics). EMPLOYEE BENEFIT RESEARCH IN8 ! ITUTE please see Chollet and Friedland, Forthcoming. 2This section is from Chollet and Friedland, forthcoming. 2121 K Street, NW /Suite 860/Washington, DC 20037-2121 ,Telephone (202) 659-0670