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.