If you expect your employer to help cover the cost of your healthcare in retirement, you may be unpleasantly surprised.
The number of employers providing health benefits for retirees has been in a state of steady erosion over the past few decades — dropping from 40% of firms to 28% between 1988 and 2013, according to a new report by the Kaiser Family Foundation. At larger companies (200+ employees) the drop has been even more dramatic, falling from 66% to 28%.
As it stands, fewer than one in five employees work for a company that offers health benefits to retirees.
"It's hard to forsee a scenario where this trend will be reversed," says Trisha Neuman, senior vice president of the Kaiser Family Foundation and co-author of the report. "Employers are making decisions on an annual basis on how they want to structure their plans. They’re deciding what they’re willing to pay.”
The root of the decline is simple enough: Healthcare is growing increasingly expensive, and as retirees live longer each year, covering their medical expenses will only grow costlier.
To mitigate future costs, some firms are capping their contribution to retiree health care, while others are tightening their eligibility standards for coverage by raising minimum age and years-of-service requirements. Newer hires may be excluded from coverage altogether. In a recent survey by Prudential Insurance Company of America, nearly half of 1,000 employers said they are considering moving to a defined contribution model, which would cap their contribution to retiree health coverage at a predetermined amount.
For young retirees, the blow to retiree health benefits has been cushioned by the implementation of the Affordable Care Act and the new healthcare marketplace. In the past, retirees who were too young to qualify for Medicare relied on employer-backed health coverage to fill in their gap in coverage until they turned 65.
Without it, they were basically at the mercy of the private insurance market, and, if they weren’t denied coverage for preexisting health conditions outright, they would often face steep premiums. The new healthcare law blocks insurers from denying consumers with preexisting health conditions and provides tax subsidies for some. Kaiser has a helpful tax subsidy calculator on its website, which you can access here.
“The fact that retirees now have a place to go to purchase insurance is a game changer,” Neuman says.
For retirees over 65, life without employer-provided health benefits is a different story. Two-thirds of Medicare beneficiaries today are not receiving benefits from a former employer, according to Kaiser. It's hard to get by on Medicare alone, as it only covers basic medical needs and excludes long-term healthcare and dental care. Without employer-provided retiree health benefits, Medicare beneficiaries mostly rely on supplemental Medicare coverage such as Medigap or Medicare Advantage.
As employers move away from retiree health coverage, it's important for workers today to prepare themselves for healthcare expenses down the road. A 65-year-old couple who retired in 2013 will spend $220,000 on healthcare over the course of retirement.
And more than 70% of seniors will eventually need some sort of long-term healthcare, which is not covered by Medicare. Pre-retirees should look into their options for long-term care insurance before they leave the workforce. The average policy costs about $3,000 a year — not cheap but certainly less expensive than the $83,950 a year you’d shell out for a private nursing home stay without insurance.
"Just as employers are keeping an eye on how to scale back on retiree health costs, it’s important for retirees or people approaching retirement to keep an eye on what their options are," says Neuman. "It's hard to find a scenario where this trend [in decreasing retiree health benefits] will be reversed. There are no guarantees."
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