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July 08, 2004
Study Finds Shortcomings in FSAs

A new study that compares the amount of money that can be saved in a tax-advantaged Health Savings Account (HSA) with the sum required to fund health care costs during retirement reveals "a dramatic mismatch," according to the nonprofit group that conducted the study, the Employee Benefit Research Institute (EBRI).

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EBRI reports that while HSAs offer the possibility of helping meet the costs of health care in retirement, they will nearly always fall far short of totally meeting that need, which can, in some cases, exceed $500,000.

HSAs, recently created under legislation backed by the Bush administration, allow purchasers of health insurance plans with a large deductible to put aside untaxed funds that can be used to meet current or future health expenses.

EBRI, founded in 1978 with the purpose of encouraging "sound employee benefit programs and sound public policy through objective research and education," said it created the best possible case in its study by assuming that HSA participants will save the maximum permissible amount and not use any funds in the HSA to pay for current expenses.

Despite that, the organization concludes there would be a significant disparity even in the few cases where these optimistic assumptions were relevant.

The new study, contained in the EBRI's July 2004 Issue Brief was written by Paul Fronstin, director of EBRI's health research and education program and EBRI President and CEO Dallas Salisbury. Not surprisingly, the study concludes that such accounts would be most helpful to those at the start of their careers. Specific examples include these situations:

  • An individual now 55 years old could save a maximum of $44,000 in an HSA prior to reaching the benchmark retirement age of 65. But such an individual living to age 80 might need $137,000 to pay premiums and out-of-pocket medical expenses. An individual who lived to age 90 might need $250,000.

  • Young workers could save more than $300,000 in an HSA over a 40-year career, but this amount would not be adequate to meet health care costs in retirement as long as medical costs grow significantly more quickly than the economy does generally.

The study stresses the need for greater savings for health care costs in retirement, particularly because employment-based retiree health benefits are being capped or eliminated, giving individual retirees greater responsibility. HSAs could be a useful tool in helping meet this need, the study concludes, but cannot be seen as a total solution.

"If the availability of HSAs encourages today's workers to focus on the issue, that will be a constructive step," concluded Salisbury, "but merely starting an HSA is no guarantee that a growing problem will be resolved."


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