This Issue Brief presents estimates of how much money a person will need to save to completely pay for health insurance and out-of-pocket health care costs during retirement. The combination of the erosion of retiree health benefits and limited benefits from Medicare and Medigap means that retirees should expect to pay a significant amount of money for health insurance and health care services during retirement. Various illustrations of needed savings are presented in this report, based on a number of assumptions regarding insurance premium levels and how they might change over time, the source of coverage, rates of return on investment, age at retirement, and life expectancy.
Many private-sector employers have been overhauling their retiree health benefit programs by limiting contributions or eligibility, or dropping the benefit for future or even current retirees. These changes have been driven by accounting rule changes that forced private-sector employers to recognize the long-term liability of the benefit, coupled with rapidly rising health costs.
Very few employees are expected to be eligible for retiree health benefits in the future. Retiree health coverage generally is offered only by large employers, as very few small employers ever offered the benefit and more than half of private-sector workers are in firms with fewer than 500 employees. In 2000, only 11 percent of all U.S. private establishments offered retiree health benefits to Medicare-eligible retirees and only 12 percent offered it to "early" retirees under age 65.
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 estimates presented from the model used in this report may only scratch the surface of health care expenses in retirement. Expenses for long-term care are not included in this discussion. Services (such as nursing home care) typically cost $50,000 or more per year. The estimates are also for individuals; married couples would need to save roughly double the individual amount, depending upon retirement age and age at death.
Policymakers may address the erosion of retiree health benefits in a number of ways, including expanding Medicare or other public programs to cover more retiree health expenses; attempting to level the playing field with respect to the tax treatment of health insurance and health care expenses among employers, active workers, and retirees; mandating employers to make or maintain commitments to provide retiree health benefits; and undertaking public education campaigns to make people aware of the health insurance costs they are likely to face in retirement and the need to personally save for them.