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This report includes a summary of key changes, including the salary level test and salary basis test.

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February 24, 2003
Many Retirees' Health Costs Could Top $1 Million
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y Americans at or near retirement age need to set aside more than $1 million to cover the medical costs they can expect to incur over the rest of their lives, according to new research from a Washington, D.C.-based research institute.

The research also finds that the highest costs will fall to the more than two-thirds of retirees who will receive no health insurance from their former employer to supplement Medicare. Such employer-provided health coverage for retirees is increasingly rare.

The research comes from the Employee Benefit Research Institute, a nonprofit, nonpartisan organization that conducts data dissemination, policy research, and education on economic security and employee benefits.

EBRI concludes, based on the research, that a 65-year old retiree without employment-based insurance may require up to nearly $1.5 million to cover lifetime medical expenses. This assumes death at age 100 and medical inflation of 14 percent annually.

For those with employment-based insurance, the maximum figure exceeds $500,000. The study is published in the February EBRI Issue Brief and was written by Paul Fronstin, EBRI senior research associate, and EBRI President and CEO Dallas Salisbury.

A man who retired at 65 and died at 80 would need $47,000 with employment-based insurance and $116,000 without it (assuming 7 percent inflation). The disparity between the two figures in each case largely reflects reimbursement for prescription drug costs included in work-based plans. Today the average 65-year-old male lives to age 80.8 and the average female to age 84.

In virtually every case, costs for those who retire prior to age 65 would be substantially higher. The estimates do not include potential long-term nursing home care, which now often costs more than $50,000 per year.

The study provides a number of Web-based planning tools that individuals can use to determine what their personal retirement health cost liability potentially will be. For more, see the links below.

"People are living longer. Medical care is getting more expensive and employers are getting out of the business of providing retiree health benefits," said Salisbury. "This puts added responsibility on employees to prepare for these major expenses. And this report helps individuals figure out how much they are likely to need."

Salisbury added that there is little evidence working Americans are now saving for the medical bills they'll confront in retirement, and noted the EBRI planning tools can help individuals take stock of their own particular needs.

Currently, 37 percent of Americans who retire prior to 65 have employment-based insurance and 27 percent of those over 65 have similar coverage. Generally, only the nation's largest employers provide it. The study offers a menu of government policy options, ranging from expanded Medicare and Medicaid programs to tax incentives for retiree health savings accounts, which might help meet the problem.

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