Health Security in Retirement - nhpf.org › library › handouts › Salisbury.slides_02-24-06.pdf · Source: Social Security Administration, Office of the Actuary. 9.5 10.8 11.9

Health Security in Retirement

Dallas SalisburyPresident

Employee Benefit Research Institute National Health Policy Forum

February 24, 2006

Outline

• Aging population and increasing health care needs.

• Projected health care costs.• Assessment of the nation’s preparedness

to provide, and pay for, retiree health care.• Options for addressing the challenge for

employers and individuals.

Source: Social Security Administration, Office of the Actuary.

9.5 10.8 11.9 12 12.615.8

19.6

2.4

2.7

2.41.91.21.3

0

5

10

15

20

25

1970 1980 1990 2000 2010 2020 2030

Perc

ent o

f Pop

ulat

ion

Disabled

65 & Over

1.31.2 1.9

2.4

2.7

2.4

Medicare Beneficiaries as a % of the Population, 1970-2030

Life Expectancy at Age 65

70

80

90

1940 1955 1970 1985 2000 2015 2030 2045 2060 2075

Male Female

Longevity

85 9290 95 100AgeMaleAge 65

50% chance 25% chance

88 9485 90 100AgeFemaleAge 65

50% chance 25% chance

97

Source: Annuity 2000 Mortality Table, American Society of Actuaries. Figures assume you are in good health.

92 9585 90 100AgeCouple(Both Age 65)

50% chance of one survivor

25% chance of one survivor

Private-Sector Trends in Retiree Health Benefits

• Fewer employers offering benefits. • When offered, retirees paying more.

– Benefits.– Health care services.

• Higher age and service requirements.• Employers reaching spending caps.• Defined contribution approaches.• Access-only plans.• New hires often not eligible. • Impact of Part D employer subsidy….

Percent of Private-Sector Establishments Offering Health Insurance to Retirees,

1997-2003

13%

22%

16%14%

12% 11%

13%

20%

15%

13%

11% 11%

13%

13%

0%

5%

10%

15%

20%

25%

1997 1998 1999 2000 2001 2002 2003

Early Retirees Medicare-Eligible Retirees

Source: Various tables at www.meps.ahcpr.gov/Data_Pub/IC_Tables.htm.

Provision of Retiree Health Benefits by Employers with 1,000+ Employees,

1991-2003

68%72%73%73%76%76%79%88%

56%61%62%62%

66%67%71%80%

0%10%

20%30%

40%50%

60%70%

80%90%

100%

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003


Source: Hewitt Associates.

Likelihood of Employers Providing Retiree Health Benefits, Sample of Same Employers with 1,000 or More Employees in 1991 and

199894%

87%87%78%

0%

10%

20%

30%

40%

50%60%

70%

80%

90%

100%

Early Retirees Medicare-Elgible Retirees

1991

1998

Source: McArdle et al., 1999.

Percentage of Large Employers Requiring Retiree to Pay Full Cost of Retiree Health

Benefits, Employers with 500+ Employees, 1997 - 2003

35% 37% 38%39%42%

31%36%

31%

35%37%

34%

40%

27%

35%

0%

10%

20%

30%

40%

50%

1997 1998 1999 2000 2001 2002 2003


Source: Mercer Human Resources Consulting.

Monthly Average Premiums for New Retirees, 2002-2004

$365$427

$487

$194 $212$262

$0

$100

$200

$300

$400

$500

$600

2002 2003 2004


Source: Kaiser/Hewitt Survey on Retiree Health Benefits, 2002-2004.

Eligibility Requirements for Retiree Health Benefits, Employers With 1,000 or More

Employees, Selected Years, 1996 & 20031996 2003

Age 50 + 10 years service 1% 3%







Based on age/service points 1% 8%

Based on age and/or service plus age/service points 6% 2%

Two or more alternatives 35% 18%

Other (e.g age only or service only) 11% 10%

Source: Hewitt Associates.

Percentage of Large Private-Sector Employers With a Cap on Their Firm's Contributions to

Retiree Health Benefits

Percent with a Cap on any plan 54%

Among employers with a cap:

Medicare-

Pre-65 eligible

Retirees Retirees

Plan is capped 84% 89%

Have already hit cap 53% 56%

Anticipate hitting cap within the next year 9% 9%

Anticipate hitting cap within the next 3 years 19% 18%

Do not anticipate hitting the cap 19% 18%

Source: www.kff.org/medicare/med121404pkg.cfm

Percentage of Large Private-Sector Employers That Terminated All Subsidized Benefits for Future

Retirees, 2002-2004a

13%

10%9%

0%

5%

10%

15%

2002 2003 2004a In 2002, survey asked employers about changes made to plan during previous two years. In 2003 & 2004, employers were asked about the past year.Source: Kaiser/Hewitt Survey on Retiree Health Benefits, 2002-2004.

Likelihood of Making Selected Changes to Retiree Health Benefits Within the Next Three Years

Very Likely

Somewhat Likely

Somewhat Unlikely

Very Unlikely

Increase retiree contribution to premiums 56% 29% 7% 8%

Increase dependent contributions to premiums 49% 26% 11% 14%

Increase coinsurance or copayments 20% 31% 26% 24%

Increase deductibles 15% 28% 33% 25%

Provide access only 11% 7% 20% 62%

Offer catastrophic plan plus savings account 6% 13% 28% 52%

Terminate all subsidized benefits for future retirees 5% 6% 23% 66%

Shift to DC approach 4% 9% 23% 63%

Add or improve coverage or benefits for retirees 4% 7% 24% 65%

Eliminate prescription drug coverage 1% 4% 20% 75%

Terminate all subsidies for current retirees 0% 1% 16% 84%

Source: www.kff.org/medicare/med121404pkg.cfm

Percentage of Retirees With Retiree Health Benefits, 1997 & 2002

39.2%

28.1%28.7%25.5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Early retirees with health benefits in own name Medicare-eligible retirees with health benefitsin own name

1997 2002

Source: Employee Benefit Research Institute estimates based on data from the Survey of Income and Program Participation, 1996 and 2001 panels.

Percentage of Retirees With Retiree Health Benefits, by Union Status, 1997 and 2002

1997 2002 % Change

Union 57.1 49.9 -12.5%**

Nonunion 32.1 21.8 -32.1%***

Early Retirees

Source: Employee Benefit Research Institute estimates based on data from the Survey of Income and Program Participation, 1996 and 2001 panels.***Change in percentage of retirees with retiree health benefits is statistically significant at the 100% confidence level.**Change in percentage of retirees with retiree health benefits is statistically significant at the 95% confidence level.*Change in percentage of retirees with retiree health benefits is statistically significant at the 90% confidence level.

Percentage of Retirees With Retiree Health Benefits, by Annual Income, 1997 and 2002

Early Retirees

1997 2002 % ChangeUnder $10,000 12.9 12.0 -7.1%

$10,000-$19,999 25.0 14.6 -41.4%***

$20,000-$29,999 44.6 18.0 -59.6%***

$30,000-$39,999 48.2 32.3 -33.0%***

$40,000-$49,999 49.9 47.7 -4.3%

$50,000 or more 63.3 49.3 -22.2%***

Source: Employee Benefit Research Institute estimates based on data from the Survey of Income and Program Participation, 1996 and 2001 panels.***Change in percentage of retirees with retiree health benefits is statistically significant at the 100% confidence level.**Change in percentage of retirees with retiree health benefits is statistically significant at the 95% confidence level.*Change in percentage of retirees with retiree health benefits is statistically significant at the 90% confidence level.

Impact of Rising Health Care Costs on Savings and Spending

34%

24%

18%

29%

45%

26%

0% 10% 20% 30% 40% 50%

Have difficulty paying forother bills

Have difficulty paying forbasic necessities

Borrow money

Use up all or most of yoursavings

Decrease your contributionsto other savings

Decrease your contributionsto retirement plan

Source: Employee Benefit Research Institute and Mathew Greenwald & Associates, 2005 Health Confidence Survey

Sources of Payment for Medicare Beneficiaries (Ages 65+) Health Care Costs

Other14%

Private Insurance15%

Medicare53%

Out-of-pocket18%

Source: EBRI estimates from the 2002 Medical Expenditure Panel Survey.

2005 Trustees Report

• “Medicare’s financial difficulties come sooner--and are more severe--than those confronting Social Security”

• “do not believe the currently projected long run growth rates of … Medicare [is] sustainable”

• Exhaustion date of trust fund is 2020.

2005 Trustees Report, cont.

• “HI could be brought into actuarial balance over the next 75 years by an immediate 107% increase in program income or an immediate 48% reduction in program outlays (or some combination.)”

• “However…adjustments of far greater magnitude would be necessary to the extent changes are delayed or phased in gradually…”

Medicare – Unfunded Liability

Future Part A benefit payments $8.2 trillionFuture Part B benefit payments $11.4 trillionFuture Part D benefit payments $8.1 trillion

Total $27.7 trillion

Net of debt held by the trust funds and represents net present value estimates over a 75-year period.

Source: GAO.

EBRI's Retiree Health Savings Model

• Allows various assumptions on:– Insurance premium level (source of insurance &

benefits covered).– Annual premium increases.– Age at time of death.– Retirement age.– Rate of return on savings.– Out-of-pocket expenses.– Medicare Part B Premium

Savings Needed for Employment-Based Benefits Access-Only Plans at Age 65 in 2015

(assumes 7% premium growth)

Age at Death

Premium Only Premium + out-of-pocket

80 $160,000 $230,000

85 $223,000 $321,000

90 $296,000 $426,000

95 $381,000 $548,000

100 $477,000 $687,000

Health Savings Account (HSA)

• Allows for tax-free accumulation of savings.– Tax free contribution.– Tax free accumulation.– Tax free withdrawals for health care services, COBRA and LTCI

premiums, retiree health premiums for Medicare-eligible retirees.• Qualified health plan.

– Self-only: Minimum $1,000 deductible, $5,100 OOP max.– Family coverage: Minimum $2,000 deductible, $10,200 OOP

max.• Contributions

– Self-only: limited to level of deductible up to $2,650 max.– Family coverage: limited to level of deductible up to $5,250 max.

• Catch-up contributions allowed once age 55 of $1,000.– Phased-in by 2009.

Are HSAs the Answer to Retirement Savings? Savings Potential in HSA

(Assumes catch-up contributions are made, 5% interest, 20% coinsurance above deductible, and $2,650 deductible indexed for inflation)

Annual $1,000 contribution

Annual $2,650 contribution

After 10 years $24,000 $48,000

After 20 years $46,000 $120,000

After 30 years $79,000 $248,000

After 40 years $133,000 $474,000

Savings Potential in HSA(with distributions)

No Distribution

Annual 10%

Distribution

Annual 50%

DistributionAfter 10 years

$48,000 $31,000

$53,000

$78,000

$108,000

$11,000

After 20 years

$120,000 $13,000

After 30 years

$248,000 $16,000

After 40 years

$474,000 $19,000

Issues with HSA for Retirement Savings

• Life expectancy for population is known, but uncertain for individual.– 99% of population will be wrong if using average life expectancy.– Life expectancy is the biggest risk to retirement savings

planning.• Needed savings even higher if costs grow 10%

– Part B premium increased 17% in 2005, expected increase of 13.5% in 2006

• HSA savings cannot grow faster than shown previously.• Should consider other potential retirement savings vehicles before

HSA.– 58% of wage & salary workers (ages 25+) eligible for DC plan– 75% participation rate, or 44% participation overall– 4% max out.– 25% of eligible IRA owners contribute– 70% max out on contribution

Medicare: Raise Taxes or Cut Benefits?

• Choices to correct the financial imbalance:– Immediate payroll tax increase from 2.9% to

5.99% (107% increase).– Immediate 48% reduction in Part A benefits.– Some combination of payroll tax increase or

benefit reduction.– Gradual changes mean much more

substantial tax increases or benefit cuts.

Sources of retiree income by age

0

20

40

60

80

100

120

60-64 65-69 70-74 75-79 80-84 85+

Earnings SSA Private DBPublic DB Annuities Asset Income

Source: Current Population Survey, Bureau of the Census

Percentage of total income by age for the retired population

01020304050607080

60-64 65-69 70-74 75-79 80-84 85+

Earnings SSA Private DBPublic DB Annuities Asset Income

Source: Current Population Survey, Bureau of the Census

How much do you need to save if you work until 67?

• Starting at age 20 and saving consistently for 47 years will support a long life at rates many are now saving, without annuity purchase.

• Waiting until 40 or 50 moves the numbers up.

• A life income annuity helps keep them lower as you only need enough to get you to average life expectancy. 0

51015202530354045

75 80 85 90 95 100

204050

Source: Ballpark E$timate Worksheet, www.choosetosave.org

Contributions to Match a DBThe total (employee plus employer) annual contributionthat would need to be put into a dc plan to provide equivalent benefits toa 1 pct high three FAP assuming salary growth of 3.9 percent by gender, entry age and rate of return.

Entry Age 25 scenario:

Rate of Return 8%benefit under 1pct high 3-male 5.2%benefit under 1pct high 3-female 5.5%

Entry Age 55 scenario:

Rate of Return 8%benefit under 1pct high 3-m 10.1 pctbenefit under 1pct high 3-f 10.8 pct Source: EBRI Calculations

Contributions to achieve 80% replacement of final pay with SSA

Retirement Age of 65Contributions from age 30 to age 60

Rate of Return 8% 5.5%

Male 8.8% 13.3%

Female 9.3% 14.1%

Source: EBRI Calculations

EBRI2121 K Street NW, Suite 600

Washington, DC 20037Phone: 202-659-0670

Fax: 202-775-6312www.ebri.org

http://www.ebri.org/

Documents

Health Security in Retirement - nhpf.org › library › handouts › Salisbury.slides_02-24-06.pdf · Source: Social Security Administration, Office of the Actuary. 9.5 10.8 11.9