Many financial experts would like to see baby boomers use health reimbursement arrangements and health savings accounts to save for retirement health care needs, but many boomers appear to have different ideas.
When researchers at Towers Perrin Inc., Stamford, Conn., surveyed holders of health accounts, they found only 16% said they strongly or somewhat agree that they use the accounts to save for health care expenses in retirement.
More than 52% of the health account holders said they use the accounts primarily to pay for current health care expenses, and 51% of the account holders said they somewhat or strongly disagree with the idea that accumulating assets in the accounts represents a significant financial opportunity.
For the most part, “employees do not appreciate the long-term potential these savings accounts hold and remain mired in the old ‘use it or lose it’ mentality of flexible spending accounts,” says Dave Guilmette, managing director of Towers Perrin’s health and welfare practice.
Many brokers report seeing that same mentality in their own markets.
Until now, consumers have been reluctant to put forth additional funding of their health savings accounts with the thought of preserving and protecting their retirement savings, says Thomas Harte, president of Landmark Benefits Inc., Hampstead, N.H.
The lingering effects of use-it-or-lose-it FSA attitudes could weaken the effects of health accounts as a financial incentive, Guilmette says.
Health account program advocates say a short-term outlook also could weaken the accounts’ ability to help boomers and others prepare for retirement.
Millions of U.S. residents already have health accounts, and ownership could grow rapidly by the end of the decade because many employers are just starting to add the programs.
When the consulting arm of Aon Corp., Chicago, surveyed a combination of large and midsize employers, it found that 23% reported offering a health account program, either as an option or as their only plan. Another 13% said they hoped to add health account plan programs by the end of 2008.
Boomers in the 55-64 age group are somewhat less interested in health accounts than younger U.S. adults, but boomers in the 45-54 age group are about as interested as members of Generation X and Generation Y, according to Mintel International Group Ltd., Chicago.
Meanwhile, many of the employers that still offer retiree health benefits programs are reducing or eliminating the benefits offered to boomer workers, and the trustees of Medicare, the federal insurance program for old U.S. residents and disabled U.S. residents, say the program could become insolvent just as the boomers start to reach normal retirement age.
Executives in the benefits operation at Fidelity Investments, Boston, have been especially visible in efforts to get the federal government to encourage boomers and other workers to save for their own post-retirement health care expenses through personal health accounts and other tax-advantaged savings vehicles.
A 65-year-old couple retiring this year will need about $215,000 just to cover medical costs in retirement, Fidelity researchers predict.
That figure does not include the cost of long term care or the cost of coping with dramatic changes in Medicare benefits structures, the researchers note.
“If today’s workers act now to take greater advantage of the many retirement savings vehicles available to them, they can create a more secure and enjoyable retirement,” says Brad Kimler, a senior vice president at Fidelity’s benefits arm.
Chronic low income, layoffs, disability, skyrocketing gasoline prices and the effects of rising interest rates on monthly mortgage payments are just some of the forces keeping boomers from contributing more to any savings vehicles, including health accounts, economists say.
A plurality of consumers in each annual household income category over $25,000 cite savings as the most important reason to use a health account, according to Mintel.
But, even in the $75,000-$99,999 category, in which interest in health savings is especially high, only 36% cite health savings as the top advantage. More than 45% cite the short-term goals of keeping premiums low and using pre-tax dollars to pay for items, such as eyeglasses, that are not covered by insurance, Mintel says.
In theory, boomers should be rushing to contribute to health accounts because they can deduct the contributions from taxable income and use the account assets to make qualified purchases without paying taxes on the withdrawals.
Obstacles include the usual concerns about the stability of any federal program; a feeling that current health care costs are likely to consume health account assets long before the holder retires; confusion about how the accounts work; limited investment menus; and, in some cases, a preference for simple, one-account retirement savings solutions over arrangements that rely on many different small accounts, financial services professionals say.
But financial services professionals say the biggest obstacle for boomers who have potential access to account programs and the means to contribute is lack of awareness.
“Employee benefit brokers must educate the health care consumer on the long term importance of providing surplus funds to their HSAs,” Harte says.
Fidelity has been trying to encourage more use of health accounts as retirement savings vehicles by introducing a Web-based health care liability projection tool.
Towers Perrin is recommending that employers reach out to boomers and others by offering more frequent and more down-to-earth communications that address emotional concerns as well as financial concerns.
“Work to increase employees’ health care time horizon beyond year-to-year, to a multiyear and, ultimately, a lifelong perspective,” the firm urges.
Financial professionals in the individual market could include projections of post-retirement health care costs in total retirement needs estimates, along with discussions aimed at replacing the old use-it-or-lose-it FSA attitude with a new “save-it-and-grow-it” health account attitude, health account advocates say.