What to Do About Early Retirees

Baby boomers. There are about 78 million of them, and they have retirement on their minds. If the past is a guide to the future, more than 80% of them will retire early (before eligibility for Medicare) even if they are not now planning on it. Even if the husband waits until age 65 to retire, chances are his wife will be younger than 65. Two-thirds will not get health insurance from their former employer and even those who have been promised employer coverage (like GM workers – see here) may see those promises broken. So millions of baby boomer early retirees will soon:

a. Discover that 60 year olds cost three to four times as much as 20 year olds to insure,
b. Learn what medical underwriting is about, and
c. Learn what it's like to pay for insurance with after tax dollars.

Under current law, employers mainly have an all or nothing choice.  That is, General Motors can include a retiree on its regular health plan at a cost, say, of $12,000 or it can do nothing.  What GM cannot do is offer $6,000 pretax to the retiree to apply to a more economical, individually owned plan.

Here is what is needed:

  1. Employers should be able to help retirees obtain individually owned, portable insurance by (a) negotiating premium discounts and (b) paying a portion of the cost with untaxed dollars and/or (c) putting the funds in a health savings account.
  2. Early retirees should be able to pay their share of premiums with pretax dollars.
  3. Both the employer and the employee should be able to save (pretax) in preparation for post-retirement health care.

This is going to be a huge issue. Congress has not acted on the uninsured before because they rarely hear from voters who have a problem. Baby boomers will be different.  They have assets to protect and they are very self interested. Fortunately, there are solutions that do not require huge taxpayer burdens.

Comments (17)

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  1. Catherine McNair says:

    First, do you really think the majority of “baby boomers” are going to retire early? I do not because of economics and longer longevity compared to earlier generations.
    I also believe we need innovation in the way we underwrite health insurance. I suggest that “spreading the risk” of people determined from age, sex and disease state does not work if your population is ageing and over 50% have one or more chronic conditions. Back in the early 80s Dr. Joseph Stokes at B/U. suggested we needed to figure qout a way to adjust health insurance premiums by overt lifestyle factors (obesity, sedentary behavior, smoking and substance abuse). I think this would be a much more fair way than how we currently underwrire – but please challenge me.

  2. John Goodman says:

    Catherine, if the past is a guide to the future more than 80% of the baby boomers will retire before the age of 65. And, even if a man waits until 65 to retire, he will likely have a younger wife who will not be eligible for Medicare.

    I’ll address the risk rating problem in a future Alert.

  3. Bruce says:

    Great proposal.

    If McCain had compaigned on this idea he might have been elected president.

  4. John Goodman says:

    I agree with you, Bruce.

  5. Jim Johnson says:

    I am in the 2nd year of the boom (1947). I left the corporate womb in 1997 to be self-employed. I purchase my health insurance as a small employer–a much better coverage per dollar than individual. BTW–I’m in NJ and that may be part of the equation). My premiums will be approx $16000 for a first rate PPO, family of three.
    My full SS will not kick in until I’m 66–so that alone would postpone “retirement.” I find many BB’s don’t know the age is not 65 for them. The recent stock market hit has almost certainly moved back their retirement dates. Boomer may re-make the concept of the Big R by continuing to work, part time, consulting, small home business etc out of necessity or fear of rusting out. In addition, as the most spoiled generation, they will out spend their reserves. Most people have no idea of the real cost of health insurance, esp if they have been employer paid. this is a major public policy issue–citizens grossly underestimate the cost of insurance and med care. what’s more, it is very alluring to continue to believe it should be free.
    Personally I think it would be greast for the USA if employers gave vouchers for a certainn level of care and individuals picked up the rest or shopped around. I’d like to see a plan where one enlists for “X-year state of the art” care–for example, I might decide to save a few bucks and choose 2002 state of the art medicine–any drug or procedure invented after would not be covered for me.
    the idea that everyone should have current state of the art is absurd and unaffordable.

    Another suggestion: all earmarks would be diverted to buying private policies for the uninsured tied to community based facilities to serve the uninsured.

  6. Bart says:

    John, I mostly agree with your assessment of the problem, but not necessarily the proposed solutions. I’d expect that retirees’ tax brackets run the gamut, especially in the first year of retirement, so using pre-tax dollars wouldn’t be of much help. But a modest tax credit for group plan premiums might entice the healthiest retirees to stay in the group, thus keeping group plans viable.

  7. Bart says:

    …I should add that I’m flexible about what constitutes a group plan. It might be something administered (but not necessarily subsidized) by the employer, or it could be a private plan with group-like provisions, such as guaranteed acceptance at age-banded rates for anyone who has maintained continuous coverage. I see no reason to cross-subsidize by age; younger workers have their own problems, and they already have to pay into Medicare.

  8. Bruce McDonald says:

    I would like to see the medically underwritten actuarial rate analysis modeling of your proposal. Thank you.

  9. David Norwood says:

    I am 63 and retired with an employer subsidized, high deductible health care plan. I have many retired friends…those who are under age 65 can afford very expensive, individual high deductible plans. My guess is that only 20% of BB’s can afford to retire before age 65. The rest will continue working.

  10. Larry C. says:

    David, I think the 80% number is based on past experience, and the retirements were not all voluntary. Many people retire because they are laid off, bought out or suffer a health problem.

  11. Ken says:

    Half the baby boomers are women; most of those are spouses; many of those are dependent on their husband’s employer-based coverage; and many (probably way more than half) are younger than their husbands.

    So even if the husband waits until age 65 to retire and then enrolls in Medicare, the wife is out in the cold — facing the very problem Dr. Goodman is writing about.

  12. Roger Beauchamp says:

    With these large corporations already bankrupt, why would they choose to include early retiree’s in their company plan if the law does not require them to? To my knowledge, the social security tax is not collected on retirement income. If corporations are permitted to transfer EXCLUDED dollars to their employee for health care needs this still grants their employees a tax advantage that others do not have. A UHA would permit them to deduct health care costs under the cap and coordinate their coverage with that of a spouse who is still employed. I believe the tax benefit should follow those who take responsibility for their own needs. What am I missing?

  13. John Goodman says:

    Roger,employers can spend an unlimited amount tax free on health insurance for their employees. But they cannot spend even one dollar tax free on individually owned insurance for their retirees — at least in most cases.

    So let’s level the playing field. Let the retiree have access to the same tax free benefit that employees have access to.

  14. Rick Bailey says:

    I see the problem of early retirees where their company has a Defined Benefit Pension plan which allows them to retire financialy around age 54 to age 58 but the company does not have a retiree health plan. Each state has diffeent rules which make it almost impossible for HR departments of multi-state emloyers to advise their retirees properly.
    The pressure on public and private employers to provide retiree health plans will get unbearable over the next 10 years. I do not believe that the government can afford to subsidize the individual health market but they should from a fairness standpoint.
    The current individual market is too small to offer the rate stability that is needed for insureds to feel comfortable. I believe that the government and the large insurance companies have come to an agreement where the government will mandate coverage and the insurance companies will offer guarantee issue which will help the individual market pricing for renewals of coverage over time. The government wants community rating in some form similar to a New jersey model which will be difficult for younger people to afford the coverage.
    The problem with discount pricing for groups of individuals with coverage is that they can leave when they find a better deal which will make it unprofitable over time unless restrictions are placed on the insured individuals being able to seek coverage away from the group that they started with.
    I think the idea of people accumulating money in a tax advantaged account over time is a good one where they are encouraged to be educated consumers.
    Our greatest possiblities are in the wellness areas because treating an aging society on our present course is unsustainable and will only lead to rationing of care for the average American and world-class care to those that can pay for it from their assets.

  15. John R. Graham says:

    Another twist on Dr. Goodman’s proposal is that the employer could buy “health status” insurance (as theorized by John H. Cochrane, and currently marketed by UnitedHealth Group’s Golden Rule subsidiary, in a rudimentary form) that hedges the employees’ risk-reclassification when they retire early, thereby immunizing the underwriting issue.

  16. Ruth Smith says:

    Either health insurance premiums should be taxable, or they should not. It is not fair that some get to pay their premiums as pretax and others cant. I had to cancel my retirement health because my portion of the premium went from $125 to $400 a month over a span of about 4 years and I could no longer afford it. Thats $4800 a year for insurance and I did not go to the doctor even once. Legislation is in for Federal retirees to get a pre tax break.
    What about the rest of us?

  17. ridwanzero says:

    Hello…..Will the lenders let them squat forever, or is there an end to rent-free periods, the way my $25,000+ annual lease has an end date?

    If these rent-free stays have no end date, then I guess we renters collectively made a huge mistake by deciding to pay rent rather than buying and then stopping payment on our mortgages (per the OC financial planners’ advice)?