Health savings accounts (HSAs), touted by their
promoters as a way to save for future health-care costs in
retirement, will likely end up leaving retirees short of
the money they need.
That is the conclusion of an Employee Benefit Research
Institute (EBRI) paper, "Saving for Health Care
Expenses in Retirement: The Use of Health Savings
Accounts," published in August. While they may provide
some help in retirement, the paper says, "the maximum
savings that can be accumulated in an HSA will be far from
sufficient to fully cover the savings needed in retirement
for insurance premiums and out-of-pocket
"There is a misinformed belief that they will be
more helpful than they really will be in retirement,"
says the paper's author, Paul Fronstin, Director of
EBRI's Health Research and Education program. "You have
got the certainty that this is the most money that you can
contribute and accumulate, and you have got the uncertainty
of how fast health-care costs are going up, what the rate
of return will be in retirement, and how long you are going
EBRI points to several drawbacks that HSAs have as an
accumulation vehicle for funding retiree health expenses:
Only those with a high-deductible health plan can have
these accounts; those accountholders face contribution
limits; given the coupling with high-deductible plans, HSA
holders likely will use a significant amount of the balance
for medical expenses during their working years; and
distributions cannot be used for employment-based retiree
health insurance premiums until age 65.
The paper offers hypothetical examples, including a
55-year-old in 2008 who starts contributing $2,900 annually
to his or her HSA. If this person makes catch-up
contributions, he or she would accumulate $59,000 after 10
However, according to EBRI estimates, a man age 55 in
2008 will need between $132,000 and $261,000 (depending on
prescription drug use in retirement) by the time he reaches
age 65 to have a 50% chance of having enough money for
premiums and out-of-pocket expenses for Medigap and
Medicare Part D.
If an individual preserves only 90% of his or her
end-of-year account balance each year, the HSA would have
just $38,000 after 10 years—and many or most people likely
will preserve a lower percentage.
"That 10% distribution of the account balance each year
has a huge impact on savings and, as you get older, you use
more health care," Fronstin says. "The benefit of a 401(k)
account is that you cannot simply tap into it. With an HSA,
there is no penalty for withdrawing money: If you need
money for health-care expenses today, you take the money
out of the account."
"What they basically say is that, even if somebody maxes
out on contributions, he will not have enough money," says
Jay Savan, a St. Louis-based Towers Perrin Principal, of
the EBRI paper. "We have asked these things to be both a
spending account and a savings account. They, by necessity,
tend to be a spending account, because they are tied to
high-deductible plans but, in order for it to be a savings
account, you cannot touch it to pay for expenses."