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Stones & Bones: health care / volume 10 number 11, November 2008 DOSE OF REALITY Even if you are well under age sixty-five, it is not too soon to be thinking about the impact your current employment status will have on your health insurance and health care costs when you do retire. Two key issues are involved here: One is whether your current or future job provides a defined-benefit retirement program or, instead, it has a defined-contribution program. The other key issue is whether the job involves paying into the Social Security benefit system. Both will have major impact on your health insurance and health care costs in retirement. First, consider the consequences of your having a defined- benefit or a defined-contribution plan. Once you become vested in a defined-benefit plan, upon retirement you receive the defined benefits for the rest of your life. Those benefits may provide complete health insurance coverage as well as a specified retirement salary. By contrast, a defined-contribution plan involves your and your employer’s putting money into an account that pays for your retirement salary and any health costs you may have—until the money in the account is expended. After that, you are entirely on your own. You then will pay the full price for any health insurance you choose to buy, and you will no longer receive a retirement salary. Because many Alaskans are working careers in state government or as teachers, I need to mention that those so employed prior to July 1, 2006, were in the defined-benefit program, whereas those first employed later, sadly enough, receive only defined-contribution benefits. Thank the 2005 Alaska Legislature for that change. The second major influence on health insurance costs in retirementis Social Security employment status. It affects the cost of Medicare health insurance in an important way, namely what you have to pay for Medicare Part A insurance coverage. Recall that basic Medicare coverage is divided into two parts: Part A and Part B. Part A Medicare insurance covers hospital stays, home health services, hospice care, and skilled nursing facility care. Part B covers medically necessary services such as doctor’s services, outpatient care, some preventive care, and other services not covered by Part A. The costs to you of Medicare A and Medicare B insurance are quite different: Medicare A insurance is expensive; Medicare B insurance is not. If your current and potential future jobs that require paying into Social Security before age sixty-five give you the equivalent of 40 quarters (ten years) or more of service, then you will have already paid for Medicare Part A coverage, so it will cost you nothing. If you or your spouse have 30 to 39 quarters of covered employment by the time you retire, then you will be charged $233 per month for the Part A coverage. Those who have less than 30 quarters of covered employment must pay $443 per month for the Part A coverage. (The dollar figures in this article are all in 2008 amounts.) Recall that Medicare typically pays only 80 percent of medical costs, so most people will need to buy supplemental (Medigap) insurance and perhaps Medicare D (prescription drug coverage) also if their Medigap insurance does not cover drugs. In the accompanying table I try to show the consequences these two major factors will have on what you will pay for health insurance after you reach age sixty-five. Most of us are married, so the numbers in the table reflect the costs of a retired couple. For a single person, cut the numbers in half. Either way, the results horrify me, as they should you. The table shows that the best situation to be in is to have been employed in a defined-benefit retirement program with full health care benefits in which you have also paid Social Security taxes for at least 40 quarters (again, that’s ten years or more). Your health care costs in retirement will be only about $2,300 plus deductibles. If you have the 40 quarters of Social Security employment but are in a defined-contribution program (or no other program), your annual cost for two people goes up to, on average, $9,513. The couple qualifying for 30 to 39 quarters will pay $15,105 on average, and the couple with less than 30 quarters will pay a whopping $19,665 on average. If this couple lives to age eighty-five, the grand total is close to $400,000. That is a lot of money that needs to be put away in a defined-contribution plan just to pay for health insurance and health care (leaving aside food, housing, and other needs to think about). With the trend away from defined-benefit retirement programs, increasing numbers of Americans are in defined-contribution programs. Many of these people will not have enough saved up for their health care and other costs. It helps a lot if they have the full Social Security benefits which include the free Medicare A coverage. Even that may be insufficient, and that is why so many people must rely on Medicaid as well. Currently, 30,000 Alaskans and over 7 million other Americans must rely on both Medicare and Medicaid benefits. Those numbers are bound to increase in future.
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