New EBRI Research: HSAs May Prove Only Marginally Useful in Creating Required Retiree Health Savings

7/7/2004

From: Jim Jaffe, 202-775-6353 or jaffe@ebri.org, Paul Fronstin, 202-775-6352 or fronstin@ebri.org, both of the Employee Benefit Research Institute

WASHINGTON, July 7 -- A new study that compares the amount of money that can be saved in a tax-advantaged Health Savings Account with the sum required to fund health care costs during retirement reveals a dramatic mismatch. While such accounts offer the possibility of helping meet the costs of health care in retirement, they will nearly always fall far short of totally meeting that need, which can, in some cases, exceed $500,000, according to projections made by the Employee Benefit Research Institute (EBRI).

Health Savings Accounts allow purchasers of health insurance plans with a large deductible to put aside untaxed funds that can be used to meet current or future health expenses. The new study, which creates the best possible case by assuming that participants will save the maximum permissible amount and not use any funds in the HSA to pay for current expenses, concludes that there would be a significant disparity even in the few cases where these optimistic assumptions were relevant. HSAs were created in the Medicare drug law enacted in December 2003.

The new study, contained in the EBRI's July 2004 Issue Brief was written by Paul Fronstin, director of EBRI's health research and education program and EBRI President and CEO Dallas Salisbury. Not surprisingly, the study concludes that such accounts would be most helpful to those at the start of their careers. Specific examples include these situations:

-- An individual now 55 years old could save a maximum of $44,000 in an HSA prior to reaching the benchmark retirement age of 65. But such an individual living to age 80 might need $137,000 to pay premiums and out-of-pocket medical expenses. An individual who lived to age 90 might need $250,000.

-- Young workers could save more than $300,000 in an HSA over a 40-year career, but this amount would not be adequate to meet health care costs in retirement as long as medical costs grow significantly more quickly than the economy does generally.

The study stresses the need for greater savings for health care costs in retirement, particularly because employment-based retiree health benefits are being capped or eliminated, giving individual retirees greater responsibility. HSAs could be a useful tool in helping meet this need, the study concludes, but cannot be seen as a total solution.

"If the availability of HSAs encourages today's workers to focus on the issue, that will be a constructive step," concluded Salisbury, "but merely starting an HSA is no guarantee that a growing problem will be resolved."