A Much-Needed Overhaul

Not every blog post I publish stands the test of time. While I always aim to produce “evergreen” articles, meaning they stand on their merits regardless of age, I don’t always succeed. My original pension subsidized healthcare post was a great example of this shortcoming.

When I published the article, the US’s Affordable Care Act (ACA), also known as Obamacare, appeared on its way to the scrap heap due to domestic US politics. This made estimating the value of healthcare attached to a US-defined benefit (DB) pension even tougher. It also led me to rant about how overly complex and unfair the system was for those going through their Golden Albatross decision. As a result, I concluded that it was an invaluable benefit for those lucky enough to have healthcare attached to their pension, especially if they intended to retire before Medicare eligibility at age 65. Therefore, it should weigh heavily in their Golden Albatross decision.

That was it. I didn’t develop any complex formulas or provide helpful suggestions on accomplishing the seemingly impossible. Nor did I provide many links to others who had tried. So much for value-added, huh?

Time and Education Begets Improvement

Surprisingly, the ACA survived, although not unscathed (Levy et al., 2020). Whether that makes valuing pension subsidized healthcare any easier for those making a Golden Albatross decision, or even those just trying to build a retirement budget, is debatable. However, unlike the previous version of this article, I don’t simply surrender and say it’s too hard this time. Instead, I review two of the best academic-level research that I could find on saving and budgeting for healthcare expenses in retirement. Doing so provides insight into how one could value their pension subsidized healthcare benefits if they were so inclined.

My own academic level research also drove me to update this article. Most of my research consisted of running and analyzing a survey I administered as part of my master’s thesis. In the survey, I asked participants to rank the pension design elements that made them consider staying at their pensionable job the most during their Golden albatross decision. Ultimately, I surveyed 308 participants. As I cataloged in parts 27 and 28 of the Pension Series, healthcare featured prominently in the research findings. Thus, I felt it necessary to consolidate those healthcare-related findings into this article too.

Those two additions resulted in a complete overhaul of my original pension subsidized healthcare article. This version is more evergreen and far less rant-filled than the previous. Furthermore, since the old version of this article formed the basis of the healthcare chapter in my book, this updated article represents my latest and most consolidated thinking on the issue. As such, this version actually assists readers looking to understand and assess the value of their pension subsidized healthcare and doesn’t just complain about it.

Definitions

The Golden Albatross (TGA) is the tension a pensionable worker feels between staying for their DB pension and leaving for greener pastures before their pension plan’s normal retirement age (NRA). Analyzing the factors involved in a Golden Albatross decision is the entire point of the blog and the Pension Series. As such, I aim to enable readers’ worth vs. worth it decision. This means they can judge the objective value of their future pension, on the one hand, which incentivizes them to stay, against all the other pressures in their lives enticing them to leave on the other.

Employer subsidized healthcare typically comes in two forms for pensionable retirees. One form is pension subsidized healthcare. In that case, the pension plan pays the costs of the subsidized healthcare coverage from the pension trust fund (GASB, 2017). The alternative form is the Other Post-Retirement Benefit (OPRB), alternatively known as the Other Post-Employment Benefit (OPEB) (GASB, 2017). For those of you unfamiliar with OPEBs, Investopedia defines them as:

Benefits, other than pension distributions, paid to employees during their retirement years. Most post-retirement benefits include life insurance and medical plans.

Some other examples of OPEBs include tuition assistance, legal advice, and support for funeral arrangements. I excluded OPEBs from my Total Dollar Value (TDV) calculations in Pension Series Part 4, primarily because they are hard to value. Nor do they necessarily come with price tags attached. For the purposes of this article, I refer to the two types of employer-subsidized healthcare for pensionable retirees almost exclusively as pension subsidized healthcare. The exception is the section where I explain the difference’s importance for someone making a Golden Albatross decision.

Lastly, throughout this article, I refer to healthcare as a pension design element. As explained in Pension Series Part 25, a pension design element is an umbrella term I coined while drafting my master’s thesis. I use it to describe all the pension features, characteristics, provisions, and penalties that pension administrators use when designing a specific pension plan. I coined the term because I needed one that described both the benefits built into a pension plan that entice people to stay until their NRA and the penalties for leaving their pensionable job before NRA.

A Uniquely American Problem

My international readers from countries that offer universal healthcare coverage to their citizens might be confused as to why some pensions in the US have healthcare linked to them. However, historically in the US, our closest thing to universal healthcare coverage and a national healthcare system only begins at age 65. It’s a program called Medicare. Thus, if you retire before age 65, you need to figure out how to finance your healthcare if your former employer doesn’t. Also, depending on which Medicare plan a person chooses, it doesn’t pay for everything, so retirees often seek Medigap coverage. Alternatively, depending on which US state a person lives in and how poor they appear on their tax returns, an early retiree might qualify for Medicaid’s safety-net healthcare coverage at any age.

Outside of those two government-funded systems, though, retirees under the age of 65 (and their working counterparts, for that matter) have three options:

• • 1. Purchase healthcare coverage themselves on the private insurance market through the ACA
    2. Rely on some subsidized version of the same through their (former) employers, if offered
    3. Run the risk and go without

Obamacare

The Affordable Care Act (ACA) attempted to reform the US healthcare system by expanding the number of people under 65 (both healthy and sick) covered by either Medicaid or the private health insurance industry. It sought to do this through a combination of increased federal subsidies to state Medicaid systems and directly to US taxpayers; forcing insurance companies to eliminate exclusion clauses for pre-existing health conditions; creating tax penalties for individuals or families who chose to go without healthcare; and creating requirements for companies over a specific size to offer their workers subsidized healthcare. Not all these provisions survived challenges in the courts, but the ACA is still the healthcare law of the land in the US (Levy et al., 2020).

It’s important to note that the ACA did not seek to fundamentally change the US’s healthcare system from a mixture of private and publicly provided health insurance. It only sought to expand the pool of covered people through a few significant tweaks to the previous system. Even before the ACA, the US healthcare system was already the most expensive in the world for taxpayers. It was also nowhere near as comprehensive in its coverage or as effective in its delivery as the 13 most developed countries globally (Squires & Anderson, 2015). The ACA did little to change those facts.

The ACA’s impact on health insurance premiums seems mixed as well. Overall, average premium prices increased modestly between 2014 and 2021 (Kurt, 2021). However, that average hides both state-to-state differences and wild fluctuations in premiums costs from year to year (Kurt, 2021). For example, in 2018, average premiums increased drastically for silver plans (i.e., the middle of the road plans) by 29%, only for average premiums to fall modestly between 2019 and 2021 (Kurt, 2021).

Medical Expenses for Retirees

How does all of this translate into medical expenses for retirees in the US? The following paragraph from Pension Series Part 25 succinctly frames the issue:

Widespread federally subsidized US healthcare coverage does not start until 65 as part of Medicare (Fronstin et al., 2011). In 2016, the average hospitalization cost US $11,700 (Liang et al., 2020). On average, household healthcare spending rises as the household ages, from 8.8% for 55-year-old to 15.6% for 75-year-old led households (Foster, 2016). Medical costs in the US increased 639% between 1979 and 2019 (Liang et al., 2020), while the overall inflation rate only rose 285% between 1979 and 2021 (Webster, 2021).

US healthcare is expensive overall, and medical costs have risen far faster than inflation over the past 40 years. That means Americans have spent more and more on healthcare than on other goods and services over the past four decades. Furthermore, medical costs also grow as people age, meaning retirees end up paying more for healthcare than in their working years, at a time in their lives when income is typically reduced.

However, the problem in the US isn’t just that healthcare is costly; some of the costs are also unpredictable (Banjeree, 2021). Not only do annual premium rates fluctuate, as discussed in the Obamacare section of this article, but out-of-pocket expenses that insurance doesn’t cover are also unpredictable (Banjeree, 2021). Thus, as I noted in Pension Series Part 27, which discussed the results of my pension survey:

Granted …households spend increasingly more on healthcare as they age. But, from year to year, no one knows what ailments will require medical care, which makes budgeting for it hard. That’s why healthcare coverage is pooled as insurance in the US. It spreads the risk of needing large amounts of money to pay for medical expenses among people in varying degrees of health. Doing this limits the budget impact of that unpredictability on any given individual.

Golden Albatross Survey Results

Given the above, it’s worth noting that pension subsidized healthcare finished atop my survey’s rankings of pension design elements that made participants consider staying during their Golden Albatross decision. It doesn’t mean the participants remained in the end. Still, pension subsidized healthcare made them think about staying more than any other singular pension design element. In fact, the competition wasn’t even close. Pension subsidized healthcare scored 10% higher than the second-place design element, an immediate annuity. You can read about the ranked results in Pension Series Part 27 if you’re interested.

That said, statistical analysis of the survey results revealed something else. As discussed in Pension Series Part 28, my:

Statistical analysis showed that a survey participant’s age and tenure correlated significantly to their pension’s proportional size in their reasoning for staying during their Golden Albatross decision. The same cannot be said for any singularly ranked pension design element discussed in Pension Series Part 27, not even healthcare. In some cases, current age and gender were also significantly linked to participants’ Golden Albatross decision outcome (i.e., stayed, departed, or undecided). Again, the same cannot be said for any singularly ranked pension design elements from Part 27. In other words, when a participant’s Golden Albatross decision occurred in terms of age and tenure, and in some cases, their gender mattered more than even the highest-ranked pension design element, which was healthcare.

What does all this mean? The ranking results suggest that the pension subsidized healthcare design element functioned as intended. It made survey participants consider the option of staying during their Golden Albatross moment the most. However, the statistically analyzed results show that no singular pension design element was more powerful than age, tenure, and in some cases, gender in predicting how important a role a potential pension played in a participant’s Golden Albatross decision. While I suspect that, when bundled together, more than one pension design element may also play a statistically significant role, my analysis was limited to examining singular pension design elements’ influence.

Funding Differences

Given that medical and health insurance costs in the US are high and that my pension survey showed how essential participants considered pension subsidized healthcare, let’s discuss how those subsidized benefits are funded. As mentioned in this article’s Definitions section, if an employer provides pensionable retirees with employer-subsidized healthcare, it can either be subsidized through the pension plan or an OPEB. There are critical differences since the former is subsidized through a pension plan’s trust fund. In contrast, the latter is funded through a separate trust fund (GASB, 2017). However, in practical terms, few pensionable retirees know about the difference.

I say that because, in the case of OPEBs, both trust funds (pension and health) are run in the same manner and typically synchronize benefit eligibility to the same conditions (GASB, 2017). Doing so essentially bundles healthcare coverage and pension payments together in a defined benefit package (GASB, 2017). As a result, few pensionable retirees understand the difference. This situation led me to note in Pension Series Part 25:

Ironically, though, most pension subsidized healthcare isn’t actually funded through the DB pension trust fund, but a separate fund set aside for healthcare. However, the bundling of healthcare coverage into the defined benefit package and synchronization of coverage start with normal retirement age (NRA), makes the distinction irrelevant for most plan participants.

Healthcare Trust Funds

That said, pensionable retirees with employer-subsidized healthcare run as an OPEB have two advantages over those with pension subsidized healthcare during their Golden Albatross moment. First, the trust fund used to fund healthcare subsidies as an OPEB has its own funding ratio, separate from the pension plan’s funding ratio. I point out that because, like some pension plan trust funds, some healthcare trust funds are grossly underfunded, both in the public and private sectors (Norcross & Gonzalez, 2018; Rezaee, 2006). Therefore, many of the same conditions used to determine the safety of a pension plan’s trust fund (see Pension Series Part 1) can also be used to assess the safety of the healthcare trust fund.

The second advantage is that should the OPEB healthcare trust fund go bust due to unfunded healthcare obligations, it won’t drag the entire pension fund down. While pensioners may lose their healthcare subsidies, they won’t necessarily lose their pension payments. Of course, having separate trust funds also creates a potential unintended consequence. In fiscal stress, employers may choose to fund their pension trust fund but not their healthcare trust fund, exacerbating those uneven outcomes.

TGA Vs. Pension Subsidized Healthcare Coverage

What are the potential effects of the US’s unique healthcare system on pensionable workers’ Golden Albatross decision? For one, a healthcare system that relies heavily on employer-subsidized healthcare under the age of 65 potentially holds pensionable workers hostage during their Golden Albatross moment. Meaning they may be suffering in a job that makes them miserable and choose to continue purely for the healthcare coverage.

As my survey results showed, this isn’t hypothetical. Although, those impacts aren’t necessarily felt evenly. In Pension Series Part 28, I noted that male participants with access to pension subsidized healthcare stayed at their jobs after their Golden Albatross decision significantly more than women, who were more likely to leave or remain undecided. The only other population of participants who experienced that same effect were those with access to Cost-of-Living Adjustments (COLAs) in their pensions.

The Impact on Retirement Planning

Furthermore, all those uneven cost issues that result from the US’s unique healthcare system make it hard to realistically plan for retirement (Banjeree, 2021; Halen et al., 2020). This is especially true if you intend to retire before the age of 65 (Medicare) and don’t have one of the employer-subsidized healthcare options I described above. By that, I mean ACA health insurance markets fluctuate so much annually that people struggle to effectively estimate how much they need to save for in retirement.

Again, this isn’t a hypothetical. Numerous articles exist on saving for and obtaining affordable health insurance in the US for those seeking to retire before 65 who don’t have an employer-subsidized plan. Many, but not all, of the best articles can be found in the Financial Independence (FI) space due to its focus on early retirement. In fact, here’s a list of articles on that subject that I compiled:

1. 1. 1. The Retirement Manifesto blog healthcare-related articles:
         • https://www.theretirementmanifesto.com/?s=healthcare
      2. Can I Retire Yet? blog healthcare-related articles:
         • http://www.caniretireyet.com/tag/health-care/
      3. ChooseFI Podcast and blog articles on healthcare:
         • https://www.choosefi.com/?s=healthcare
         • https://www.choosefi.com/planning-for-healthcare-in-early-retirement/
      4. Our Next Life blog:
         • https://ournextlife.com/2018/11/14/health-care-2019/
      5. Investopedia website:
         • https://www.investopedia.com/articles/personal-finance/080516/top-3-health-insurance-options-if-you-retire-early.asp
      6. The Balance.com:
         • https://www.thebalance.com/retire-early-and-lower-your-health-care-costs-4152065

Medicare Planning

Retirement experts even note the difficulty conventional retirees (i.e., those without employer-subsidized healthcare looking to retire at age 65) have when planning for Medicare costs (Powell, 2021). That’s partly due to the medical cost inflation I cited above and because Medicare has multiple plans. Each of those plans comes with varying prices and coverages attached to them. Thus, estimating average costs involves many not always knowable factors. This results in various scary numbers for future retirees if present value (PV) calculations are used for total future costs. As an example, the Employee Benefit Research Institute found  (Frostin & VanDerhei, 2020):

For a 50 percent chance of having enough to cover health care expenses in retirement, a couple with median prescription drug expenses needs $168,000 in savings. For a 90 percent chance of having enough, the couple needs $270,000 in savings. This is down 10 percent from 2019. At the extreme — a couple with drug expenses at the 90th percentile throughout retirement who wants a 90 percent chance of having enough money for health care expenses in retirement by age 65 — targeted savings are $325,000 in 2020.

Whereas Fidelity found that (Fidelity Viewpoints, 2021):

According to the Fidelity Retiree Health Care Cost Estimate, an average retired couple age 65 in 2021 may need approximately $300,000 saved (after tax) to cover health care expenses in retirement.

Furthermore, I should emphasize that none of these estimates include Long Term Care (LTC – i.e., nursing home) costs, which Medicare doesn’t cover. From an overall retirement planning perspective, that’s a potentially expensive exclusion given the high costs associated with LTC (Halen et al., 2020). As a result, I discuss LTC as it relates to the Golden Albatross further down in this article.

Alternative Planning (and Valuation) Methods 

Not everyone agrees with the PV method of saving for medical and healthcare expenses in retirement. Two recent studies that use Medicare as a cost basis emphasize the utility of estimating annual healthcare and medical costs as part of a yearly retirement budget (Banjeree, 2021; Halen et al., 2020). I provide a quick synopsis of each (below) because I believe they directly relate to valuing pension subsidized healthcare during a Golden Albatross decision. Plus, in my mind, they offer a more practical method of saving for healthcare in retirement than the PV method.

T. Rowe Price (an investment firm) produced one of the studies. In it, they argued that (Banjeree, 2021):

Lump-sum estimates of health care costs covering the entire duration of retirement are not useful for budgeting and planning purposes because health care expenses are not incurred as lump sums.

Furthermore (Banjeree, 2021):

Combining premiums and out-of-pocket costs tends to distort the perception of the risk of health care costs in retirement and complicates the associated financial planning. Premiums are relatively stable at the individual level, but out-of-pocket costs are more uncertain and, as a result, accounts for most of the variation in health care costs. Premiums also constitute the bulk of their health care expenses for the majority of retirees. As a result, for most retirees, a large chunk of their annual health care costs is predictable and can be easily planned for, a fact masked by the combined lifetime health care cost estimates.

Finally (Banjeree, 2021):

As a result, we believe that framing health care costs in retirement should be based on (at least) three factors:

• • • • Annual costs
      • Type of health insurance coverage
      • Separation of premiums and out-of-pocket expenses

Using T. Rowe Price’s Approach

I embedded the T. Rowe Price document below and strongly recommend reading it, full stop. It’s packed with several interesting graphics and a lot of helpful information about saving for retirement healthcare. However, the central theme is that concern over unmanageable retirement healthcare expenditures is unfounded for approximately 90% of US retirees, assuming they have access to Medicare. In that light, the results of my pension survey, with healthcare scoring 10% above the second-place design element, may show such over-emphasis.

In my opinion, the document manages future US retirees’ expectations well. It also effectively walks them back from an almost visceral fear that unpredictable medical costs will ruin their retirement. Furthermore, in presenting their argument, the authors unknowingly provide pensionable workers a method for valuing their pension subsidized healthcare.

The T. Rowe Price process consists of boiling down knowable, annual, reoccurring expenses and less knowable, out-of-pocket expenses into a range of probabilistic yearly costs. In the article, these costs are based on the type of Medicare coverage a person selects and their medical history. Those costs are then incorporated into a retiree’s annual budget, which they can align retirement income against, much as I recommend in my Gap Number articles.

Interestingly, a person could easily swap the Medicare costs with those from their pension plan’s subsidized healthcare plan. In other words, a person could take the T. Rowe Price calculation method, plug in the information (like annual premiums) from their pension’s healthcare plan, make a probabilistic prediction for out-of-pocket expenses based on medical history, and then calculate how much (or little) they might expect to spend annually. A pensionable worker contemplating an early departure before earning pension subsidized healthcare might even find enough information on an ACA alternative to run a cost comparison. If this interests you, then check out the document below!

True Causes for Concern

As helpful as I found the T. Rowe Price article, a Retirement Management Journal (RMJ) article from 2020 entitled “Understanding the True Cost of Health Care in Retirement” is also worth examining. It also recommends separating annual, reoccurring costs from less easy to estimate out-of-pocket expenses to estimate total yearly healthcare costs (Halen et al., 2020). The authors packed their article with a lot of convincing data that shows most annual healthcare and medical expenses in retirement are reoccurring versus unexpected for a large percentage of Medicare retirees (Halen et al., 2020). As a result, they too recommend budgeting for these costs annually, much like the T. Rowe Price article.

The RMJ authors also believe that future US retirees overemphasize the risks associated with healthcare costs while underestimating the risks from other retirement budgetary categories like housing. The following quote from the paper’s abstract sums up those findings succinctly (Halen et al., 2020):

The truth facing retirees today is that numerous financial risks and uncertainties threaten their ability to spend their hard-earned money and maintain the quality of life they desire. Perhaps the greatest worry for those in, or near, retirement is whether they will be able to afford rising healthcare costs, particularly unplanned out-of-pocket expenses. Retirees’ concerns around health care are not without merit, yet a closer look reveals a different picture. Our research concludes that healthcare expenses for many retirees are a small percentage of total spending and are far less variable than most people think, making them easier to plan for properly than conventional wisdom suggests.

I embedded the RMJ article below for those interested in reading it.

The Next Level

However, unlike the T. Rowe Price article, the RMJ article also examines Long Term Care (LTC), longevity expenses, and the risk they pose to a successful retirement. The authors argue that the dangers posed are based on the high costs of LTC and the higher overall healthcare costs that retirees with longevity incur (Halen et al., 2020). In other words, LTC is expensive, and retirees with longer lifespans rack up more medical expenses compared to those with shorter lifespans.

The article presents convincing evidence that these two areas are where the actual healthcare-related risks to retirement planning lie. As such, the authors recommend the purchase of LTC Insurance (LTCI) and annuities to combat the respective risks (Halen et al., 2020). A 2021 Marketwatch article by Robert Powell summed up the research paper this way (Powell, 2021):

An appropriate strategy for managing healthcare expenses in retirement is to plan for known or diversifiable risks and insure the unknown or nondiversifiable risks, including longevity and long-term care expenses, according to the Retirement Management Journal paper. In other words, buy an annuity to manage the risk of longevity and long-term-care insurance for long-term care expenses.

Truth in advertising, Powell notes that not every retirement planner agrees with that advice. Honestly, his Marketwatch article is well worth the read, especially if you’re not going to read the full-length T. Rowe Price or RMJ articles. You can find it here.

LTCI vs. The Golden Albatross

I mention the LTC and longevity risk issues for two reasons. The first, although rare, is that some employers offer LTCI as an OPEB for their pensionable retirees. These OPEBs may or may not include subsidies. Even if they don’t, in many cases, employers appear to bargain collectively on behalf of employees for better premiums, much like the Federal Long Term Care Insurance Program. In the California state employees’ pension system (CALPERS), employees who participate in the LTCI program contribute 100% of the money over their working career for the insurance. However, CALPERS invests and grows the contributions on their behalf to meet premium costs in retirement (CALPERS, 2022).

Even in these limited forms, some pensionable employees may want to consider LTCI during their Golden Albatross decision. This may be particularly true for pensionable employees who already have known long-term health issues. Alternatively, pensionable employees with little or no family to provide LTC may also need to carefully consider leaving a pensionable job with LTCI on offer.

Longevity vs. The Golden Albatross

Second, since the RMJ article’s solution to the medical costs associated with longevity risk was an annuity, it makes a pensionable employee’s Golden Albatross decision even more critical because a pension is an annuity. Moreover, as I point out in Pension Series Part 25, scholars found that pension fund annuities are far more efficient than those provided by insurance companies (Rhee, 2014). So, there’s little likelihood that a pensionable employee could leave a pensionable job and then find an insurance annuity of similar quality for the same amount of money that the pension fund would spend. Thus, if a pensionable worker’s longevity is a concern, they won’t get a better deal than a pension plan’s annuity.

Furthermore, longevity risk is a genuine concern for female pensionable workers because they live longer than males on average (Rhee, 2014). For example, an examination of 2016 US Social Security data revealed that 2/3rds of married women who reach the age of 65 outlive their husbands by 11.5 years on average (Garnick, 2017). Moreover, as explained in Pension Series Part 29, the efficiency effect compounds in favor of women who choose to annuitize their pension. Thus, a pension annuity works in a woman’s favor on multiple levels by addressing longevity risk.

Grumpus’s Takeaways

The entire point of the Pension Series is to examine the multitude of issues surrounding the use of a pension to achieve Financial Independence (FI) or, alternatively, leave a pensionable job after making a well-informed decision. Determining the importance or value that a pensionable worker should place on pension subsidized healthcare can help on either account. As a result, it’s worth explaining my thoughts on when and how pension subsidized healthcare should impact a pensionable worker’s retirement planning or their Golden Albatross decision. I do that below by providing three takeaways.

First, though, I’m not afraid to say while updating this article, my thinking evolved on the importance a pensionable worker should place on their pension subsidized healthcare. It’s no longer the all-important monolith I once thought. The evolution started with the results of my survey, where pension subsidized healthcare dominated the polling but failed to register as a statistically significant factor in a participant’s Golden Albatross decision and outcome. Contrast this with demographic factors such as age, tenure, and in some cases, gender, which did register as significant for the decision and outcome. Reading the T. Rowe Price and RMJ articles further catalyzed my thinking. They made me realize that not everyone will value their pension subsidized healthcare equally.

Grumpus’s Takeaways: Overvaluing Healthcare

Takeaway number one is not to overvalue your pension subsidized healthcare. This is a distinctly different takeaway from the previous version of this article. In fact, it’s almost the opposite from my “pension subsidized healthcare is invaluable” insight from version one. It begs the question, “how do I justify the reversal?”

Based on the findings of the T. Rowe Price and RMJ articles, it’s apparent that the more likely a US pensionable worker is to retire at, or after, Medicare eligibility (65 years old), the less critical pension subsidized healthcare becomes. Indeed, after 65, pension-related healthcare coverage is supplemental to Medicare and merely fills in the gaps. And, as both articles point out, those gaps (i.e., the out-of-pocket expenses) aren’t really all that large on an annual basis for most US retirees. Thus, many soon-to-be retirees overemphasize the importance of mitigating unexpected healthcare expenses that most likely won’t come.

The exception to this takeaway is if a pensionable worker suspects they will retire with serious medical issues. Chronic medical problems increase the likelihood of significant out-of-pocket expenses in retirement (Banjeree, 2021; Halen et al., 2020). Thus, the higher the probability that a retiree will have significant out-of-pocket expenses that Medicare won’t cover, the greater importance they should place on their pension’s pension subsidized healthcare coverage.

Grumpus’s Takeaways: Early Retirement

Takeaway number two focuses on the intended age that a pensionable employee retires and the age at which pension subsidized healthcare starts. In other words, the younger a person wants to retire, and the earlier the pension subsidized healthcare starts, the more valuable it becomes since Medicare doesn’t start until age 65. Therefore, pension subsidized healthcare should weigh more heavily in an Golden Albatross scenario where the pensionable employee intends retire early.

In such cases, calculating the dollar value of the pension healthcare may be necessary to obtain a true sense of what’s at stake. The T. Rowe Price article’s method for estimating expenses could be applied using data inputs from the pension system’s healthcare plan. Ideally, those results could be compared to an ACA plan.

Although mentioned towards the beginning of this article in passing, in these cases, it’s critically important to determine if pension subsidized healthcare starts at the pension plan’s normal retirement age (NRA), which is when most pension plans’ payments start. In most cases, healthcare coverage will probably be synchronized. For example, if pension payments start at 55, so does the pension subsidized healthcare plan. But not all function this way. The non-standardization of DB pensions in the US means that each plan is unique, so someone aiming for early retirement must research their individual plan.

Full Disclosure

Truth be told, the healthcare aspect of my Golden Albatross decision combined takeaways one and two. By the time I hit my Golden Albatross inflection point at year 17 of a 20-year military career, I knew I was taking chronic medical issues into retirement. I also knew that I wanted to retire early (mid-40s) and that the Defense Department (DOD) and Veteran Administration’s (VA) healthcare coverage started immediately upon retirement in synch with my pension payments. Thus, healthcare featured prominently in my decision to gut it out to 20 years of service.

Even if I had transitioned at 17 years of service to the civilian world without earning my pension, the VA portion of my medical coverage would’ve followed. It would’ve covered all of my service-connected medical issues for the remainder of my life. However, I also had two young kids and a spouse. The highly subsidized DOD health insurance (in the form of an OPEB) for me and my family was synchronized to 20 years of service. So, I felt the pressure to stay for that insurance and therefore valued it accordingly.

Why am I telling you this? For one, I acknowledge that my experience may have biased my insights and choice of takeaways. For another, it’s to re-emphasize my point that the DOD’s healthcare only held value based on my desire to retire early. Had I intended to leave the military in my 40s, start another career with employer-subsidized healthcare, and work until age 65, then I would’ve valued that DOD subsidized healthcare differently.

Grumpus’s Takeaways: Pension Subsidized Healthcare is not LTC

My final takeaway is don’t conflate pension subsidized healthcare with long-term care (LTC) or long-term care insurance (LTCI). Unless you know that your pension’s subsidized healthcare plan covers LTC, you should assume it does not. I say that because, as the RMJ article discusses, LTCI is expensive due to the many unknowns surrounding a person’s future needs. Thus, most pension systems try to avoid it unless it’s the employee who fully funds the premium costs.

That said, don’t forget to plan for LTC if you think you will need it. Pensionable retirees with no family or a higher likelihood of LTC needs due to medical history would be wise to plan, save, and budget accordingly. As the RMJ article points out, LTC is where the genuine threat of unplanned out-of-pocket expenses for retirees lies.

Final Thoughts

In Part 3 of the Pension Series, I stated that the most valuable pensions:

• • • Fully vest pensionable workers more rapidly than others (e.g., 20 years vs. 35 years)
    • Calculate initial pension amounts (i.e., Initial Dollar Value) using formulas with high-income averages and percentage multipliers
    • Start payouts immediately upon retirement
    • Provide Consumer Price Index-linked Cost of Living Allowance (COLA) for the entire pension amount

I provided this list to help pensionable workers going through their Golden Albatross moment determine if they had a valuable pension. As a result, for my US readers, it’s worth adding:

• • • Provides pension subsidized healthcare coverage

Whether or not healthcare should rank first, middle, or last on the above list is really up to the pensionable worker based on their retirement intentions and perceived future medical needs. Generally, though, the closer to Medicare eligibility at age 65 that a US pensionable worker intends to retire, the less valuable their pension subsidized healthcare becomes. This assumes they qualify for Medicare and don’t have expensive and chronic healthcare issues.

I base that assessment on the compelling findings from the two academic articles I reviewed in this post. Both papers essentially argue that most future US retirees place an unnecessary amount of concern on potential out-of-pocket expenditures in retirement. As a result, retirement quality of life needlessly suffers, while risks arise from other areas of the retirement budget. Ultimately, these findings suggest that pension subsidized healthcare isn’t quite the dead weight around the neck of pensionable workers that many (including me) once thought it to be.

Thus, it’s probable that only those people who don’t have a healthcare solution for their retirement years before age 65 will need to determine the mathematical value of their pension subsidized healthcare. This need may arise during someone’s Golden Albatross decision, especially if the greener pastures they want to depart for don’t include employer-subsidized healthcare coverage in the pre-65 retirement years. As a result, they may even need to compare ACA costs to the alternative of pension subsidized healthcare.

The method for calculating annual or monthly healthcare costs discussed in the T. Rowe Price article provides the potential to do that. It recommends calculating costs in terms of monthly or yearly expenses to budget against them, similar to my Gap Number articles. Lucky workers may also find enough ACA information to make a comparison. Since I haven’t done this myself, I don’t know how much work it may involve. Hopefully, though, you now feel better prepared to make these calculations due to this updated article!