Traditionally, employer- and union-sponsored retiree health benefits have served as an important source of supplemental coverage for people on Medicare. But, those days are gone.
The Kaiser Family Foundation has been tracking trends in employer-sponsored health coverage, and has documented a significant drop in the share of large employers (200 or more workers) offering retiree health coverage, from 66% in 1988 to 23% in 2015. Firms that continue to offer retiree health benefits have adopted various strategies to limit their liability for these costs, including: hard caps on their financial liability, a shift from a defined benefit to a defined contribution approach, and increases in premiums and cost-sharing requirements paid by retirees and their spouses. In recent years, some employers have elected to offer retiree benefits through contracts with Medicare Advantage plans and private health insurance exchanges.
The Foundation found five national surveys show a shrinking share of seniors on Medicare with supplemental retiree health coverage. For example, in the survey providing the highest estimates of retiree coverage among people ages 65 and older on Medicare—the American Community Survey—the share declined from 31% in 2008 to 25% in 2014. In the National Health Interview Survey, the share declined from 24% in 2005 to 16% in 2014.
The drop in retiree health coverage has important implications for those nearing retirement and younger generations. Fidelity’s Retirement Health Care Cost Estimate study now projects a healthy couple retiring this year at age 65 should expect to spend $245,000 on health care throughout retirement, up from $220,000 last year. The figure has increased 29% since 2005, Fidelity says, when the projection was $190,000.
For those near retirement, the decline in employer-sponsored retiree health coverage could lead to an increase in the demand for individually purchased Medicare supplemental (Medigap) insurance policies and contribute to the rise in Medicare Advantage enrollment, particularly among those who are willing to trade more limited provider networks for the financial protection that comes with a limit on out-of-pocket spending, the Foundation says.
For younger generations, it signals a need to save more for retirement.
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