Health costs threaten retirement savings

By Dave Carpenter • ASSOCIATED PRESS • September 4, 2009 Health Care Q&A CHICAGO — Health-care costs are the trapdoor lurking beneath every retirement plan. Drug prices are soaring, retiree health plans are being cut back or dropped, and Medicare premiums have doubled in seven years, taking an increasing bite out of Social Security checks. Medicare Part D, which subsidizes the cost of prescription drugs, has helped with but not solved the problem of high drug costs. And with health-care expenses still growing 1 percent to 2 percent faster than inflation annually, as they have been for a generation, the problem doesn't figure to go away overnight regardless what happens in Washington. People over age 65 spend on average roughly 30 percent of their income on health care, according to the AARP Public Policy Institute. It's worse for early retirees or other older people who aren't yet eligible for Medicare. Older customers who don't have employer-sponsored health insurance often pay four or five times more than younger ones for the same coverage. "Holding down health-care costs is just a huge issue for seniors and will continue to be," said David Certner, legislative policy director for the over-50 group AARP. Two experts on retirement health-care benefits and costs shared their thoughts in interviews on the outlook for seniors and how people might best prepare for and handle the financial burden. Here are excerpts of comments by Certner and Anna Rappaport, a Chicago-based actuary on retirement issues who chairs the Society of Actuaries' committee on post-retirement needs. How would you characterize the state of health care for seniors? RAPPAPORT: Total health-care costs are higher than anybody imagined they would have been. That affects seniors along with everybody else. Because of Medicare, seniors have had fewer problems with access to health care. But as Part B (medical insurance) premiums are rising and more doctors are reluctant to take on Medicare patients, seniors are affected more today than they were 10 years ago. They have to be concerned about the future of the health-care system and of Medicare. CERTNER: Health care is obviously becoming a more and more critical part of retirement income security. We used to talk about the three-legged stool of retirement security: pension, savings and Social Security. Now we talk about it as four pillars, with health care. How do you think the proposed overhaul of the health-care system will affect seniors? Certner: For those on Medicare, we're basically looking for several key things out of this legislation. First, no benefit cuts or added costs. Second is improving the drug benefit and holding down drug costs. Third is some of the doctor payment issues. Having Medicare pay doctors more fairly will make it easier for beneficiaries to continue to get access to and see their doctors. RAPPAPORT: Potentially, it could be a major help to seniors not yet eligible for Medicare by offering them new options and access to coverage even if they do not have employer coverage. For those eligible for Medicare, I do not think the proposed legislation is likely to make a big change. Do you think universal health-care coverage is achievable? CERTNER: Everybody's getting health care today. Some people are just getting it in less appropriate places, such as emergency rooms. Most people who have studied this believe that having everybody covered under a health insurance program is a better way of delivering care and ultimately can help us hold down costs. If people can't bolster their savings, what can they do either before or in retirement to better deal with high costs? RAPPAPORT: Try to stay healthy. If you are in an organization without retiree health benefits, try to keep working until you're eligible for Medicare. If that's not feasible, if you have an HMO option for health care that would allow continued coverage, that might be a good choice. CERTNER: Putting off your retirement for a year or two can substantially raise your standard of living. For every additional year you work, you've got one more year you're adding to your Social Security benefit, one more year you're adding to hopefully your pension and savings, and one less year you're having to draw down on your savings. Besides higher costs, what has changed for retirees' health care in recent years? RAPPAPORT: The percentage of large employers offering retiree medical plans has dropped. For Medicare-eligible retirees, it's fallen from 40 percent in 1993 to 19 percent in 2008, and for pre-Medicare retirees from 46 percent to 27 percent, according to a Mercer survey of employer-sponsored health plans. And those who do provide it have very often increased the retiree cost-sharing. Many years ago, once someone was retired, usually the coverage could not or would not be changed. Today, most employer plans include an unlimited right to change coverage. CERTNER: Most people don't see their employer-provided retiree health benefits canceled altogether. Most times there are cutbacks — premium increases or cutbacks in services, or maybe you have to pay more for your spouse. That in itself is problematic. A lot of people who may think they're secure in their retiree health benefits may not be. What are the long-term implications of escalating costs? RAPPAPORT: Health-care costs are a major problem for our society at large: Medicare threatens the federal budget; employer plans threaten business viability and make American businesses uncompetitive; Medicaid is a problem for states, and many people don't have good coverage. The future of America depends on our getting the system under control. Should long-term doubts about the viability of Social Security have any impact on how people approach their retirement planning? RAPPAPORT: It will be smart for people to save more, be cautious about spending and plan to retire later. Actuaries are very concerned that many people do not realize how important it is to think long term in retirement planning and to remember that no one knows who will live beyond age 100, only that some people will. What changes do you envision to Social Security in coming years, if any? RAPPAPORT: It seems to me inevitable that the retirement ages in Social Security will be increased beyond what they are now — probably at least to age 70 between now and 2050. I think there will also be some small changes in the benefit formula. Together with raising the retirement age, that will go a long way to address the imbalance between the amount of benefits paid out and the amount of money coming in. CERTNER: The Social Security problem is not nearly as dramatic as the health-care problem. Even in a worst-case scenario, if we don't do anything, 30 years from now people will still get three-quarters of their benefits. But at some point in the future it's likely there will be some adjustments. At least for some, the preferred option is to raise the level of wages above which people no longer pay Social Security taxes (currently $106,800). With Social Security, we can actually point to how to fix the system. With health care, it's not as clear cut.