Grumpus the Second Confessor
I have another confession to make to my dear readers (that makes two for those keeping track). When I covered how to calculate the Total Dollar Value (TDV) of your pension in Part Four of this series, I purposely restricted the calculations to retirement income owed to a retiree through a pension fund. I didn’t include Other Post-Retirement Benefits (OPRBs), alternately known as Other Earned Benefits (OEBs). For those of you unfamiliar with OPRBs, Investopedia defines them as:
Some other examples of OPRBs include tuition assistance, legal advice, and support for funeral arrangements. I excluded OPRBs from my TDV calculations primarily because they are hard to value, and do not necessarily come with price tags attached. In the U.S. at least, no better example of this exists than pension-linked or subsidized healthcare.
A Grumpus History of U.S. Healthcare
My few international readers from countries which offer universal healthcare coverage to all of its citizens might be confused as to why some pensions in the U.S. have healthcare linked to them. However, historically in the U.S. 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 prior to age 65, you need to figure out a way to finance your healthcare. Depending on which U.S. State a person lives in, and on how poor they appear on their tax returns, a person might qualify for the safety net healthcare coverage called Medicaid 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; 2) rely on some subsidized version of the same through their (former) employers (if offered); 3) run the risk and go without. Each of those options is problematic in its own right, but combined they create a perfect storm for retirement planning chaos. That’s especially bad if you are trying to account for healthcare costs in a realistic retirement budget before you retire.
The Affordable Care Act (ACA), or Obamacare in the vernacular, attempted to reform the U.S. healthcare system by expanding the number of people under the age of 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 U.S. 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 certain size to offer their workers subsidized healthcare.
As of October 2017, the ACA has met with mixed results. It expanded healthcare coverage to approximately 20 million more people than before. It did this mostly by providing the opportunity for previously ill and currently poor people to obtain healthcare coverage. However, it did not create a painful enough tax penalty to force healthier and younger citizens to join the private health insurance markets in enough numbers to offset the costs of that expansion. As a result, the ACA increased health insurance costs for a lot of families who were already paying for their own coverage. It also increased costs for businesses forced to provide subsidized healthcare to its employees.
The ACA was created by a Democrat-controlled Congress and Executive Branch without support from the Republican opposition. That created a lot of political acrimony which saw dozens of Republican-led Congressional and Judicial efforts to overturn it. As of October 2017, the ACA has survived those challenges fundamentally intact. However, the ACA’s mixed bag of results, along with the political acrimony its establishment created, continues to draw the current Republican-controlled Executive and Congressional branches of the U.S. government towards the siren’s call that is “repeal and replace”. None of this should be interpreted as an endorsement of one side or the other’s policies, but merely an observation on how much changed over the past eight years, and the potential for change over the next four, based on the politics that swirl around the U.S. healthcare system.
At this point I think it’s important to note, the ACA did not seek to fundamentally change the U.S.’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 large tweaks to the previous system. Even before the ACA, the U.S. healthcare system was already the most expensive in the world in terms of cost to taxpayers. It was also nowhere near as comprehensive in its coverage or as effective in its delivery as the 13 most the developed countries in the world. ACA did little to change those facts.
As a result, for most Americans healthcare is either a system that goes too far towards socialized medicine, or doesn’t go far enough. It is a point of view which correlates strongly to a person’s affiliation with one of the two dominant U.S. political parties. Regardless of their political stripes though, I would hope all Americans could agree the U.S. ended up with an idiosyncratic and inefficient bastardization of both free-market and social healthcare policies which serves few of its citizens particularly well. Instead of cherry picking the potential best ideas from both worlds, or at least striving for the mediocrity that pragmatic political compromise often produces; the U.S. seemingly muddled its way into an overpriced but low-quality quagmire.
The Golden Albatross Vs. Healthcare Costs
Why does that matter to someone writing a Financial Independence (FI) blog dedicated to those who earn pensions? For two reasons actually. The first is that the healthcare system as I described above, which relies heavily on employer-subsidized healthcare, potentially holds my readers hostage during their Golden Albatross moment. Meaning they may be suffering in a job that makes them miserable, and choose to continue the suffering, purely for the healthcare coverage. I don’t think that is a particularly fair system on a personal level. Nor do I believe it to be a particularly efficient economic system at the national level in terms of human capital and the free flow of labor.
Now, I might be willing to accept the first issue, if it were not for the second. That is the fact that the U.S. healthcare system, and all the uncertainty surrounding it, makes it nigh impossible to realistically plan for retirement prior to the age of 65 (Medicare) IF a person and their family does not have access to one of the subsidized healthcare options I described above. By that I mean private healthcare costs are fluctuating so much on an annual basis within the insurance markets that a person cannot effectively estimate how much they need to save for the next year, let alone invest in order to pay for their own health insurance in future years.
If you are a longtime reader of this blog, you know how much I emphasize planning for retirement. If you’re not a long time reader of this blog (and by that I mean all five months this blog’s been active), then you should check out my Planning section. Once you do, you’ll realize how much I emphasize planning for retirement! That said, Chris Mamula gets to the crux of the retirement planning problem that healthcare poses in his guest post over at the “Can I Retire Yet?” blog:
“Consider this example given in an analysis by the Kaiser Family Foundation if ACA subsidies go away. They note, “…a low-income 60-year-old could get a silver plan for $83 per month (with ACA subsidies) but would have to pay $775 per month if he bought that plan without a subsidy, plus he would have a higher deductible because he would no longer benefit from cost-sharing subsidies that are only available on the exchange.” Using the “Rule of 300”, and plugging in the ranges from the example above means that projected savings needs for health insurance premiums would range from $24,900 ($83×300) to $232,500 ($775×300).”
Holy schneikes! Did I quote that passage correctly? I just checked, and indeed I quoted that passage correctly. That is almost ten times more from top to bottom of that cost scale! How does one plan for such a wide variable in their retirement plan?
As Chris goes on to point out in his post, he and his wife can’t plan for something so nebulous. One of them will need to keep working at least part-time in order to obtain healthcare through an employer. Currently, that responsibility falls to his wife, since she loves her part-time job. Personally, I think it stinks that a couple who would otherwise be able to plan and save enough money for health insurance in early retirement cannot do so, simply because it’s impossible to effectively estimate potential future costs. However, their less than ideal situation also proves my first point as to why this matters to readers of a personal finance blog.
Not to leave you hanging, Chris and his wife built some other options too so his wife doesn’t feel trapped. You should check out the rest of the post. Chris is much more succinct than me, and the read is worth your time if you need to explore pre-Medicare age retirement healthcare options. For a slightly different perspective on healthcare planning for a pre-Medicare age retirement, you can also check out Fritz’s article at Retirement Manifesto on the top four worries in retirement. It’s an article I’ve cited and mentioned before. Fritz and his wife are planning for $20K a year in healthcare costs for the uncertain years before Medicare kicks in. Ugghhh.
OK, up to this point I’ve proven beyond a shadow of a doubt (i.e. I’ve ranted) about how much the U.S. healthcare system sucks, and how hard the current conditions make planning for the future. But how does it relate to the Pension Series? Well, 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)? I am doing this in order to help you determine if it’s “worth it” to stick it out and earn your pension.
As I’ve pointed out in one of my previous posts, all pensions are not created equal, which means some pensions are objectively more “worth it” than others. However, that does not take into consideration your personal circumstances, which may out-weigh the most valuable pension. The best I can do is to help you identify how valuable your potential pension is. Or I can try, because in the case of pension subsidized healthcare, that is a tall order.
By painting the above depressingly realistic picture on the state of the U.S. healthcare, it should now be obvious just how important a pension which provides some form of subsidized healthcare as an OPRB could be to anyone looking to retire prior to age 65. We might go so far as to label it “invaluable”, which would contrast significantly with other parts of the Pension Series where I demonstrated how valuable some aspects of a pension can be. In the case of pension subsidized healthcare though, I don’t think a dollar value can be determined with any kind of accuracy. It’s that nearly ten times magnitude of a cost window that Chris Mamula referred to in his article. Anyone have a crystal ball that can determine the future of the U.S. healthcare system? No? Well, until then, pension subsidized healthcare will remain a wildcard when determining your pension’s value.
That said, I weight any pension with subsidized healthcare heavily towards the “highly valuable” end of the scale. In Part 3 of the Pension Series, I identified the following common features that make up the most valuable pensions:
- Vested workers after short periods of employment
- Calculate initial pension amounts (what I now call 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
It’s obviously time to modify that list (for my U.S. readers at least) to include a pension with subsidized healthcare coverage as one of its OPRBs. How high in importance on that list should subsidized healthcare coverage be? For now, given all the uncertainty swirling around healthcare in the U.S., I place healthcare coverage in the top three most important features that help to determine my pension’s value. Which is to say neck-and-neck with a high Initial Dollar Value calculation and CPI-linked COLA.
I’ve interacted with some folks in the FI space who say pension subsidized healthcare is the singular most important feature of their pension. That may be an appropriate assessment if they have a lot of medical issues. Or they may believe healthcare costs will continue to inflate faster than the rest of the CPI (assuming they have a CPI-linked COLA). That’s the frustrating point of this entire post. Without some certainty on where the U.S. healthcare system is heading, and the costs associated with it, a determination of the value your pension subsidized healthcare holds is entirely subjective.
I understand if you find yourself stuck in a Golden Albatross moment, and uncertain about what you should do based on the fact that healthcare is provided with your future pension. I was there a few years ago myself. Ultimately I made the decision to stay and earn that pension. I did this in part because of the heavily subsidized healthcare coverage provided for me and my family in retirement. Conversely, you might be beyond your Golden Albatross moment, planning for retirement prior to Medicare starting, and have pension subsidized healthcare. If so, you have an unquantifiable yet powerful tool at your disposal to shape your retirement in ways many others will not. I would encourage you to safeguard it and use it wisely.