Summary
The Use of Health Savings Accounts for Health Care in Retirement
HSA CONTRIBUTION LIMITS: Health savings accounts (HSAs) are often touted as a vehicle for funding future retiree health care costs. However, statutory contribution limits mean that they are unlikely to play more than a minor part in savings for health care costs in retirement.
POSSIBLE ACCUMULATIONS AT CURRENT INTEREST RATES: If an individual age 55 in 2009 were to contribute $3,000 to his or her HSA and also contribute the $1,000 catch-up contribution each year for 10 years, $48,300 would be in the account after 10 years at a 2 percent interest rate. And if the interest rates was 5 percent, $55,100 would be accumulated at the end of 10 years.
NEEDED HEALTH SAVINGS: Such savings levels by themselves are inadequate to cover health costs in retirement. A man age 55 in 2009 would need between $144,000–$290,000 by the time he reached age 65 in 2019 (depending upon his use of prescription drugs in retirement) to have a 50 percent chance of being able to cover premiums and out-of-pocket expenses for Medigap and Medicare Part D. Thus, a 55-year-old man would be able to use an HSA to accumulate between 16–32 percent of needed savings for insurance premiums and out-of-pocket expenses in retirement for a 50?50 chance of having enough savings. For a 90 percent chance, the maximum HSA savings would cover between 7–16 percent of the necessary savings amount. Women, who live longer than men on average, will need more.
Tax Expenditures and Employee Benefits: Estimates from the FY 2011 Budget
MORE THAN A THIRD OF ALL TAX EXPENDITURES: For the next fiscal year, all employee benefits-related tax expenditures ($380.83 billion) will account for 36.0 percent of the $1.06 trillion tax expenditures in the federal budget, according to President Obama’s FY 2011 budget.
HEALTH BENEFITS NOW TOP BENEFITS TAX EXPENDITURE: Tax-favored employment-based health insurance benefits will account for the largest tax expenditure presented in the budget ($176.96 billion, or 16.7 percent of the total amount and 46.5 percent of all employee benefits-related tax expenditures), followed by employment-based retirement plans ($111.69 billion, or 10.6 percent of the total amount and 29.3 percent of all employee benefit-related tax expenditures). By comparison, the tax expenditure for the home mortgage interest deduction for owner-occupied homes will be $104.54 billion.