Healthcare costs are a major source of financial insecurity for older Americans.
Healthcare costs have risen two to three times faster than inflation in recent decades, which disproportionately affects older Americans, especially those not yet eligible for Medicare. Seniors age 65 and older are partly insulated from cost increases through Medicare, but out-of-pocket costs, especially for prescription drugs, can still be substantial. The share of retirees 65 and older relying entirely on Medicare—that is, not covered by supplemental insurance—has risen rapidly: from 34% in 1996 to over 40% in 2002.
Fewer employers are providing retiree healthcare.
In 2002, only 34% of large firms (firms with more than 200 employees) offered health coverage to retirees, a sharp drop from 1988, when 66% offered retiree health coverage. The rate is even lower (5%) for small firms (Weller et al. 2004). Meanwhile, those companies still offering retiree health benefits have tightened eligibility standards, slashed benefits, and increased the share of costs borne by retirees.
The decline in coverage particularly affects those not yet eligible for Medicare.
Individual coverage can be prohibitively expensive or—for those with preexisting medical conditions—may not be available at any cost. Numerous studies have shown that older workers often delay retirement in order to remain insured, though this is not an option for those in poor health.
But healthcare costs are high even for seniors covered by Medicare.
The Employee Benefits Research Institute estimated that in 2003, a 65-year-old without employer-provided retirement health-care coverage would need $164,000 in savings to cover medical expenses (including Medigap premiums, Medicare B premiums, and out-of-pocket expenses) until age 85. This conservative estimate does not include the cost of long-term care, and assumes premiums will rise by only 7% a year.
Many workers are forced into early retirement because of health issues.
A recent survey by McKinsey & Company found that people may be overly optimistic about their ability to work into their 60s. While 45% of baby boomers say they expect to work past 65, the average retirement age is 63 for men and 62 for women. Working longer—at least in a job with comparable pay and benefits—is often not a choice for those who develop health problems or are laid off late in their careers. About 40% of workers are forced to retire earlier than planned, with health—or health of a family member—the reason cited for over half of these early retirements. Though early retirement can have negative financial impact on all workers, workers with traditional pensions are generally better protected than others since three-fourths are in plans that have disability benefits.
Prescription drug costs remain a burden for retirees.
The new Medicare prescription drug program has not solved the problem of high drug costs. Due to poor plan design—notably a rule preventing the government from negotiating lower drug prices—studies have found that drug prices offered by the private plans are generally no lower than those at low-cost pharmacies like Costco. This is true despite a $1,124 government subsidy per enrollee, plus a $250 deductible and annual premiums averaging $324 a year. Though the program will save money for seniors with exceptionally high drug costs who choose their plan carefully, it is not surprising that many eligible seniors have thus far declined to enroll.