Threat of Social Security Depletion Emphasizes Importance of HSAs, Proponents Say

Because of rising health care costs and the predicted insolvency of Social Security, experts tout HSAs as a powerful tool to save up for health care expenses.  

With Social Security’s Old-Age and Survivors Insurance Trust Fund projected to be depleted by 2033, and the cost of health care expenses continuously increasing, proponents of Health Savings Accounts say these “triple-tax advantaged” accounts are the most powerful way for people to pay for health care expenses in the future. 

The Social Security Administration recently announced that the combined accounts of the OASI and Disability Insurance Trust Fund are on track to fall short a year earlier than originally projected. As a result, Kevin Robertson, chief revenue officer at HSA provider HSA Bank, believes Congress may raise the age for when one can start claiming Social Security retirement income payments and that people should not plan to rely solely on Social Security funds to pay for their medical expenses in retirement. 

“If you think about it, in a person’s retirement, health care expenses are going to be the largest single category of need,” Robertson says. “Beyond rent or mortgages or living expenses, health care for the average American is very expensive. … When you’re older, the likelihood of having health issues accelerates.” 

Inflation is also driving up the cost of health care and prescription drugs, which in turn increases the cost for plan sponsors. According to data collected by Mercer, employers are projecting a 5.4% average increase in health benefit costs per employee in 2023. 

Meanwhile, HSAs reached $112.5 billion in assets at the end of January, up 8% since year-end 2022, indicating that more people with high-deductible health plans are investing in HSAs.  

A primary benefit of HSAs is that they offer a triple tax advantage: contributions go in tax-free, the funds grow tax-free and they can be withdrawn tax-free.  

A recent survey from the Employee Benefit Research Institute showed that 24% of workers were enrolled in an HSA-eligible health plan in 2022. However, the same survey found that deductibles are also prominent in non-HSA plans, with employee-only deductibles averaging $1,451 in health maintenance organizations and $1,322 in preferred provider organizations in 2022.  

“In other words, many workers are enrolled in health plans with deductibles high enough to be HSAeligible but are not technically enrolled in an HSA-eligible health plan and thus are unable to contribute to an HSA,” the EBRI report states. “Something is holding these employers back from offering HSA-eligible health plans to give workers the means to pay their out-of-pocket expenses through HSAs.” 

Only participants in so-called high-deductible health plans can put money into an HSA. 

Robertson says about 100 million Americans are currently able to use the benefits of an HSA, and that number is growing every year.  

A recent bill was introduced in Congress aims to expand the use of HSAs to a broader cross section of Americans, Robertson explains. Entitled the Health Savings for Seniors Act, the proposed bill would allow people who are enrolled in any type of Medicare to contribute to HSAs. 

“[The bill] would dramatically open up the ability for seniors to better afford health care expenditures, save for their future and stretch those health  care dollars,” Robertson says. “Even if they use the accounts solely as an expense pass-through, they would earn the tax benefits of being able to stretch those health  care dollars further.” 

According to Medicare Interactive, those who are currently enrolled in Medicare Part A and/or Part B cannot contribute pre-tax dollars to an HSA because, in order to contribute pre-tax dollars, one cannot have any health insurance other than an HDHP. Medicare participants can, however, continue to withdraw money from an HSA after enrolling in Medicare to pay for expenses, such as deductibles, premiums, copayments and coinsurances.  

The Health Savings for Seniors Act was first introduced in April 2022 and is backed by Representative Ami Bera, D-California, and Representative Jason Smith, R-Missouri. The bill did not receive a vote last year, but Robertson says it is expected to be reintroduced to Congress at the end of this month. 

Robertson says, if passed, those enrolled in Medicare could contribute to an HSA from any source of money, whether that be a retirement account, regular income or a Social Security payment. 

Unlike flexible savings accounts, HSAs have no time limit for when one must spend the money on qualified health expenses. The IRS allows participants to roll over their HSA funds every 12 months and still maintain the tax-free status.  

“This is one of the reasons why HSAs are so powerful,” Robertson says. “It affords a lot of flexibility and control in terms of what they’re able to do. It doesn’t matter if one is spending now or spending later, ; they still get the benefits on the front end and on the back end.” 

Nicole Asher, a senior wealth management adviser at Greenleaf Trust, in Kalamazoo, Michigan, says in order to prepare for the projected Social Security insolvency, plan sponsors need to encourage participation in their retirement plans. 

“Even if somebody starts with [contributing] a minimal amount out of each paycheck, and that grows each time they get a raise, it really does make a difference,” Asher says. “If Social Security cuts are made, people need to be prepared, and the longer they have to prepare, the better off they’ll be.”