Early Retirees

There are 78 million baby boomers and a very large number of them have retirement on their minds. If the past is a guide, more than 80% of them will retire before they become eligible for Medicare (at age 65). Although about one-third of U.S. workers have a promise of post-retirement health care from an employer, almost none of these promises are funded and, as is the case of the automobile companies, are likely to be broken in whole or in part.

As a result, millions of retirees will find themselves buying their own insurance in the individual market. There they will face some unpleasant realities, which for many of them may come as a shock:

  • Whereas employers typically pay about 75% of the premium at work, these retirees will have to pay 100% of the premium out of their own pockets.
  • Whereas the share of premium paid by employees tends to be the same — regardless of age — individual insurance premiums for, say, a 60-year-old tend to be 5 times higher than for a 20-year-old.
  • Whereas employers are forced to accept employees into their health plans and charge the same premiums regardless of health status, people in the individual market typically face medical underwriting. They may be charged higher premiums because of a health condition, face exclusions or be denied coverage altogether. If they are forced into a risk pool, they may face waiting periods as well as higher premiums.

Unwise public policies will make these problems even worse. And far from correcting these mistakes, ObamaCare promises to pile new problems on top of existing ones.

In general, tax law, labor law and employee benefits law favor the active employee and discriminate against the retiree. For example, here are three public policy barriers that will stand between early retirees and affordable health insurance:

  • Although tax law allows employers to pay premiums for group insurance for active employees with pretax dollars, employers cannot make premium contributions to the individually-owned insurance of their retirees with untaxed dollars.
  • Although many employees are able to pay their share of health insurance premiums using premium-only plans set up by their employers, retirees must pay their premiums with aftertax dollars.
  • Although the ability to pay premiums with untaxed dollars encourages employer-paid health insurance for current medical expenses, there is no easy way for employers and employees to save for future medical expenses — including post-retirement expenses.

As for employer promises of post-retirement health care, it tends to be an all-or-nothing proposition. That is, employers can keep their retirees in their group insurance plan — paying with pretax dollars — or they can do nothing. It’s hard to be in between. If an employer cannot afford, say, $12,000 family coverage for a retiree, the employer cannot split the difference and contribute $6,000 to the employee’s individually-owned insurance. Such a contribution would be treated as taxable income.

The obvious solutions to these problems are: (1) allow employers to contribute (say, to a retiree’s Health Savings Account) any contribution the employer can afford to make; (2) allow the retiree to pay his share of premiums with pretax dollars and (3) allow active employees and their employers to save tax-free — knowing that they will face the problem of post-retirement care.

Yet precisely because these solutions are obvious, direct, simple and workable, they are nowhere to be found in ObamaCare.

Instead, the new law creates subsidies for employer-provided insurance for retirees between now and 2014. However, these subsidies go not to individuals but to employers. And because higher-income employees are more likely to have an employer promise of post-retirement care, the subsidies will go to those who least need them.

These subsidies end in 2014, by which time insurers — selling in a newly created health insurance exchange — will have to accept all applicants regardless of health condition. Since the difference in premiums in this artificial market cannot exceed 3 to 1 (rather than the actual cost ratio of 6 to 1), the idea is to overcharge young people so that 50- and 60-year olds can be undercharged.

Problem is: It appears the mandate will be weakly enforced. If people wait until they get sick to insure, the average premium in the exchange will have to be quite high to cover the costs. As a result, seniors could face higher premiums in the exchange than they would have faced with no reform at all.

Comments (22)

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  1. Ken says:

    You expect me to be shocked and surprised that the “direct, simple and obvious” solutions are no where to be found in ObamaCare?

  2. Larry C. says:

    78 million baby boomers may decide that ObamaCare is not the answer to their problems. If so, I hope they throw the rascals out.

  3. Beverly Gossage says:

    If you look at which companies offer early retiree insurance benefits, it is typically those whose employees are in a union. Enough said.

  4. Neil H. says:

    I think what Beverly is suggesting is that this is intended to be a subsidy for union members. And forget everybody else.

  5. Vicki says:

    The entire health care bill seems to be one special interest provision after another. There apparently was no concern for the general welfare.

  6. monkeywrench says:

    Instead of presenting the American people with a health care plan that lowers costs, increases coverage and lessens government involvement in medical decisions, President Obama and the Democratically-controlled Congress have prepared a model of health care that looks more and more like it was designed for the old Soviet Union. The architects of this Rube Goldbergesque contraption should be thrown in the Gulag for committing legislative malpractice!

  7. Andy says:

    You should send this to the WSJ for publication.

  8. Carl says:

    I like the Gulag idea.

  9. Virginia says:

    It’s always interesting to have the facts boiled down: The idea is to overcharge young people so that older people can pay less.

    I don’t know a single person on the planet that is not aware of the passage of time, and yet the idea of insurance premiums rising due to increased risk of health problems is such a shock that people don’t know how to budget for it? Give me a break.

  10. Pam V. says:

    I might also add that under the new health reform, companies will receive a much smaller subsidy for providing prescription drug coverage to retired former employees. My father’s company will stop providing coverage next year, so my parents will have to get Medicare Part D for drug coverage. Mom is dreading this and is trying to switch all her medications to generic so she can avoid having to sign up for Part D. While I do agree that individuals, not employers, should get the subsidies, it is a shame that ObamaCare will crowd out private coverage and force people into a public program that is already broke.

  11. Steven Bassett says:


    GI, community rating, and a weak mandate will lead to significant selection, but with 3:1 age rating maybe not enough to make 55+ premiums higher than 55+ premiums are today with unlimited age rating and medical underwriting. We shall see. Consider too that margins are likely to be lower through the exchanges than todays individual market. It is dissapointing that affordability will not be available via true high deductible insurance on the exchanges. Even with impact from employers dropping retiree coverage I’d expect retirement trends not to slow to a great extent (making the big assumptions that markets hold up and inflation is low in the face of pro-decline policies)

  12. Steven Bassett says:


    Forgot this disencentive to work: Early retirees can take lower income and get subsidy to buy through the exchange. With no mortgage many retirees couples might do fine on $40 or $50K (and plenty will have dependents up to 26 so subsidy eligible income amount goes up)

  13. Ken says:

    I think Steven is correct about the disincentive to work. Lots of people experience “job lock” under the current system. If they can get highly subsidized insurance, priced well below actuarial fairness, a lot of them will quit working and retire.

  14. Tom H. says:

    The more we learn about ObamaCare the more evident it becomes that it does not solve any problem in a rational way.

  15. Eric S. Graber says:

    John Goodman’s warning is on point. Personally, My wife and I suffered through five years of high health insurance premiums and restrictions until qualifying for Medicare. Our future regarding healthcare expenditure seems murky.

  16. Uwe Reinhardt says:


    I have made an appointment for you with Dr. Irving Krankheit at Baylor Medical School. He is a cardiologist specializing on softening of the heart, a very dangerous medical condition for conservatives. You should not miss that appointment–Monday at noon.

    But while your heart is bleeding over the unjust subsidies going to high income people under Obamacare, give a thought or two to your propsal to make insurance premiums tax deductible. That bestows unneeded public subsidies on high income people, too.

    From a cardio standpoint, though, it means that you heart has not gone totally soft. There’s hope for your health as a conservative: support the well to do.



  17. Stan Ingman says:

    John, I agree with your assessment in part. However, it is interesting you turn to BO and the government for better solutions. Why not focus in private sector shortcomings and their failures?

  18. Don Levit says:

    With the spread between young and old at 3 to 1 (instead of an actuarially more accurtate, say 5 to 1), why won’t the premiums for the young simply be higher, starting from a higher base?
    You are right about the private sector.
    It seems to me that conservatives’ God is the amrket.
    Liberals’ God is the government.
    Nowhere is the original God on display.
    Don Levit

  19. Bill J. says:

    Why are so many people like Uwe so opposed to high earners getting some sort of break from the Fereral government? Uwe, maybe you better keep that appointment for yourself. It seems that you have a hard heart toward high earners. Get checked for class envy while you are at the doctor.

    High earners pay a higher percentage of taxes than any other group in the country. The top 1% of earners pay 40% of all taxes. That’s not conservative talk radio facts, that’s CBO and Treasury Department facts. Look it up. It’s public information. If someone making a lot of money gets a bone thrown to them every once in a while, I’m OK with it. Instead of being envious of high earners, why not channel your energy into improving your position in life?

  20. Don Levit says:

    Bill J:
    The problem is not that we have high earners.
    The problem is that our economy depends on 70% of its GDP on consumer spending.
    When wealth is overly concentrated, the consumers who can afford to spend can consume only so much.,
    Remember when consumption used to be a disease?

    Another statistic on the high income earners, is that the top 10% “consume” 72.3% of the financial assets.
    Is that a healthy spread for an economy so dependent on individual participation?
    Go to:
    Look on page 3.
    Don Levit

  21. Thomas says:

    “Yet precisely because these solutions are obvious, direct, simple and workable, they are nowhere to be found in ObamaCare.”

    Ha! I just had to laugh, we really shouldn’t expect government pundits to do something simple and workable, that doesn’t lead to aggrandizing more and more power to themselves. ObamaCare is just a stepping stone to get what the socialists want – total socialized medicine. Statist interference in the marketplace has always been the problem and we always get the same answer, more statist interference is needed. Their programs always screw everything up and we are always told the problem, the real problem, is that they just didn’t have enough power – the program just wasn’t all encompassing enough.

    Presently, they don’t have the political will to establish total socialized medicine, so they inundate the public with political sound bites about 34 million uninsured Americans leading them to believe these are people that want health insurance and are prohibited from having. Also, the public has been led to believe that it is free in ObamaCare. The Act, however, tells us who these 34 million people are – they are young, healthy and don’t want to spend their money on that right now, they might be saving up for their first home, paying off student loans and buying iPhones and the like. Oh, that’s horrible, their failure to buy health insurance is adversely affecting the market, Congress must step in and apply the law backwards and force them to buy health insurance so Congress can regulate it toward beneficient ends. These greedy healthy people are depriving the ill and “forcing” them to accept the financial responsibility of their own condition!

    It’s just wealth distribution – same song to a different tune. It saddens me that Americans are so weak minded they put up with this kind of crap, where are men like the Founding Fathers when you need them?

  22. Joe S. says:

    Thomas, I like your style.