Report: HSAs won’t cover retirees’ medical costs

A combination of statutory contribution limits and low interest rates is hampering the use of health savings accounts as a way to cover future health care costs for retirees, according to the Employee Benefit Research Institute.
In a new study, entitled “The Use of Health Savings Accounts for Health Care in Retirement,” author Paul Fronstin estimates that the average husband and wife turning 65 this year will need slightly less than $376,000 in savings to cover medical expenses that aren’t paid by Medicare. Typically, Medicare pays a little more than half of the health care costs for beneficiaries.
Enter the HSA, the tax-exempt account that works in conjunction with a high-deductible health plan and permits tax-free distributions for qualified medical expenses.
Annual deductibles for the plans in 2009 were at least $1,150 for individuals and $2,300 for families. Annual contributions into HSAs last year were capped at $3,000 for individual coverage and $5,950 for families.
The limit eventually results in owners coming up short in covering medical expenses, according to Mr. Fronstin’s report.
For instance, if a 55-year-old in 2009 chipped in $3,000 to his or her HSA and contributed the $1,000 catch-up contribution annually over the next decade, the account would accumulate a total of $46,200, assuming an interest rate of 1% over the decade and that no withdrawals were made.
At a 2% interest rate, the person would have $48,300 at the end of the decade; at 5%, the account would grow to $55,100.
That, however, is just a fraction of the savings retirees would need to help pay for Medigap policies, Medicare Part B and D premiums and out-of-pocket drug costs 2019. For a 65-year-old man in 2019, median prescription drug costs through retirement are expected to hit $144,000. Median drug costs for a 65-year-old woman will hit $210,000 through retirement, starting that year.
As a result, retirees can only count on HSAs to cover a portion of their health care costs: If a woman who’s 55 in 2009 wants a 90% chance of saving enough to pay for premiums and out-of-pocket costs, she’ll need to save up between $370,000 and $754,000 and she can use the HSA to cover a maximum of 12% of that amount, according to the report.
“What HSAs do is give people an option — and it’s a great option because money can build tax-free — but it’s limited,” Mr. Fronstin said. “So you still have to take advantage of other savings vehicles: max out your 401(k), take advantage of matching contributions and contribute to your IRA.”
“All the options that were there before the creation of HSAs are still there,” he added.
The analysis doesn’t account for long-term care and nursing home costs, Mr. Fronstin said.