Where Have Our Long-Term Health Benefits Gone?
Since false assumptions led to unfunded benefit plans, here's what you must know now
Local governments across the state of Wisconsin are facing billions of dollars in unfunded obligations to retirees in the coming years. These debts have piled up to as much as $6.5 billion over decades, as departments promised their individual employees as much as $250,000 in health care benefits without setting aside the money to pay for them.
Now, lawmakers in Milwaukee have introduced a bill to eliminate all retiree health benefit plans for all government employees.
The Wisconsin debts look small, however, when compared with the debt of larger states such as California. Unfunded retirement benefits, including pensions and health benefits, total $1.2 trillion in the Golden State, according to some estimates from the Stanford Institute for Economic Policy Research. So much for the golden years.
Life Expectancy Rates Changed
Companies and governments formulated these pension plans based on some false assumptions, it turns out. First, life expectancy rates changed dramatically, and companies are paying out for decades now — instead of just a few years. They also miscalculated the return on their investments.
"The companies made assumptions that the money they set aside and invested for these payments would make 6, 8, 9 percent a year," said Christopher Kimball, president of CK Financial Services in Lakewood, Washington, and a certified financial planner practitioner. "But interest rates have gone way down, and those assumptions have not come true. The benefits can't be paid as robustly if the money set aside hasn't grown enough."
"There are very few defined benefit plans around anymore. Those plans are disappearing," said one financial analyst.
Retirement benefits can be broken down into two broad categories: defined benefit plans, and defined contribution plans. The defined benefit plans include pensions and retiree health care plans, in which companies promise to pay a certain amount of money to the employee based on salary and years with the company. "There are very few defined benefit plans around anymore," Kimball said. "Those plans are disappearing. They're going to be extinct."
Start Saving Now, Kids
These changes could leave younger employees in the lurch. The saving habits of the older generation relied on exorbitant pensions, which meant they didn't need to save as much for their own retirement. Now younger employees need to set aside money to pay for both their retirement and their health care, using only the 401K defined contribution plans.
Kirsten Curry, president and founder of Leading Retirement Solutions in Seattle, Washington, said her company witnessed 23 percent growth in the number of clients who signed up for their 401K services — and they expect a 30-percent increase for 2017. However, Curry doesn't "see the younger generation enrolling in the [401K] plans at a high rate," she told LifeZette.
The Social Security system is a type of defined benefit plan, which could be why it has been plagued with so many problems.
"More than ever, [employees] have to be responsible for their own retirement savings," Curry said. "Even for me — I'm a business owner in my 40s — and I'm looking at the prospect of the Social Security system potentially not being around by the time I'm ready to retire. I'm even of that mindset that I need to make sure I'm saving enough for my own retirement."
Even if Social Security remains intact, the current benefit "on average only pays 40 percent of what a person needs to keep his or her same lifestyle in retirement," Kimball explained. In general, if you're under 30 years old, you need to put away "10 percent of your gross income toward retirement," he noted. "If you're between 30 and 45, you need to be putting away at least 15 percent."
How Much More Will Health Costs Rise?
Even if younger employees understand the need to save money to maintain their standard of living once they get older, they may not understand their health care expenses are also likely to grow. Seniors older than age 65 spend an average of $4,888 annually to pay for deductibles, copayments, premiums, and other health care expenses not covered by insurance. That's twice as high as the annual spending for non-elderly adults. And for those 85 and older, the spending increases to about $8,304 per year.
For these situations, employees may begin using health savings accounts (HSAs) as well as 401Ks, to try to offset the loss of a health care benefit during old age. HSAs provide some of the best tax advantages on the market: contributions to an HSA are not taxed, the funds grow without getting taxed, and the withdrawals for valid medical expenses are not taxed. Account balances can be invested and grow from year to year. More than 16 million Americans now use health savings accounts, with an estimated 2 million joining each year.
As retirement benefits continue to diminish, it's likely these alternative methods for saving will grow in popularity. They'll have to — if the majority of Americans want a decent retirement.