Retiring with healthcare

It seems inevitable that government retirees will be picking up more of their healthcare costs as soaring expenses, demographic forces and new accounting disclosures compel governments to reassess retiree healthcare benefits. (See “Ready for retirement?” American City & County, Feb. 2006.) As public employers shift more healthcare costs to retirees, employees must plan to meet those costs.

Under financial pressure, many governments have increased premiums, deductibles or co-pays for employees and retirees. The Employee Benefits Research Institute’s 2004 Health Confidence Survey reports that one-quarter of workers who have experienced healthcare cost shifts have cut their own retirement contributions as a result, reducing savings that may be needed to pay future healthcare costs.

At age 65, most public employees become eligible for Medicare, and those who do not may purchase Medicare Part A coverage. Because Medicare only pays 50 percent of a typical retiree’s healthcare costs, retirees should purchase Medigap insurance or join a Medicare Advantage Plan, unless they have strong healthcare coverage from a former employer.

Federal law requires that a person enrolling in Medicare Part B must be allowed to purchase guaranteed renewable Medigap insurance at standard rates. Costs of Medicare supplemental coverage range from zero to more than $1,000 per month. Costs in various areas may be estimated at www.medicare.gov, “Personal Plan Finder.”

Those who retire before Medicare eligibility at 65 may face a few surprises. For example, even though 80 percent of states and a slightly lower portion of large local governments still provide some health benefits for younger retirees, benefits are seldom cost-free and may only be eligible to purchase employer group health insurance at full cost. Most programs have rigorous eligibility requirements and may provide no spousal benefits.

If their employers offer no retiree health benefits, young retirees may have trouble finding affordable individual coverage. At the very least, they can pay for coverage through the federal Consolidated Omnibus Budget Reconciliation Act (COBRA) under the employer’s group for 18 months after separation, at the employee’s full cost — making 63½ the youngest a person may retire with continuous federally protected health coverage.

COBRA coverage can be expensive. A retiree younger than Medicare age might pay one-third of the typical $36,000 yearly pension for healthcare. After COBRA eligibility ends, comparable individual health insurance may be even more expensive and can be difficult or impossible to find for those with pre-existing medical conditions.

With healthcare costs increasing at their current pace, governments likely will continue shifting some of those expenses to employees and retirees. To prepare, individuals should consider increasing retirement savings, preferably in programs with tax advantages. As cost shifts occur, cities and counties should educate their employees and give them access to savings programs to help them meet their future responsibilities.

Robert Barkin is vice president of corporate communications for Washington-based ICMA Retirement Corp.