Retirement Planning: The Challenging Intersection of Health and Wealth
Retirement used to mean years of leisure. However, with increased life expectancy, defined contribution schemes with varying investment returns, lack of coverage in traditional pension schemes and underfunded pension and retirement plans, retirement stability is an unknown for many. While pensioners may look to retirement as a well-deserved period of relaxation after years of work, their former employers could face increased health care expenses due to longer life expectancy, and pensioners might also feel this additional financial pressure.
The costs associated with retiree health are worryingly large. For example, in the U.S., the average 65-year-old retiree with Medicare would need 11 times his or her final pay for retirement, about 25 percent of which would be used to pay for unsubsidized medical care during retirement. In addition, a typical retiring 65-year-old couple retiring this year will need about $280,000 to cover health care costs through the course of their retirement. Retiree health benefits supplement the costs associated with government-funded programs, such as the U.S.’s Medicare or Social Security programs, but most of this funding is associated with legacy or grandfathered benefit arrangements. And health care costs in retirement are a global concern. In Singapore, for example, 50 percent of the current working age population is concerned about rising health care costs both in terms of availability and affordability during retirement.
Companies’ expanding financial obligations to provide benefits during and after an employee’s working years may seem daunting. But to trim these growing costs, wellbeing is becoming a focus for many employers. By promoting wellbeing – physical, emotional, social and financial – employers can create holistic programs that focus on an individual’s entire wellbeing – proactively addressing health concerns that can be caused by financial challenges, including emotional stress.
So how can employers reimagine their benefit offerings to ensure they are meeting the needs of both their current and future retiree populations? And does it require a new approach to health and retirement benefits before retirement even begins?
As Cary Grace, chief executive officer, Global Retirement & Investment, Aon, puts it, “Health and wealth are connected in more ways than we often consider. Health care costs affect workers’ short- and long-term finances, and financial wellbeing affects physical health and engagement at work.”
In years past, when it was more common for individuals to be employed at one company for their entire career, organizations typically offered their former employees benefits that included subsidized health care. Over the past few decades, however, according to the AonBenefit SpecSelect benchmarking database, the number of large employers that offer sponsored, employer-paid health benefits packages for retirees over 65 years of age dropped from 56 percent in 2000 to 11 percent as of 2017.
This decrease is caused by several factors, including longer life spans, which have increased the costs of these programs. John Grosso, senior vice president, Health & Benefits, Aon, states, “Longevity risk – people living longer – is a key issue for both the plan sponsor and the retiree. Plan sponsors must find the most efficient way to deliver the promised health care benefits – either through a group structure or individual markets – because people might be taking advantage of their employer-sponsored benefit for a very long period of time.”
Another factor affecting health benefit costs is based on government regulations. As of 1990, the Financial Accounting Standards Board required private sector employers to account for health benefits care costs for current employees and retirees. This change led large firms to reduce their retiree benefits offerings.
Further, companies must also address rising health care costs. According to Aon’s 2018 Global Medical Trend Rates survey, the average increase in medical costs worldwide was 8.2 percent, with an inflation rate of 2.8 percent. While the U.S. tops other OECD countries in total health care spending as a percentage of GDP, this high level of costs is not an isolated issue. Jim Winkler, senior vice president and global chief innovation officer, Health & Benefits, Aon, says, “Regardless of geography, the health care ‘problem’ is global. Throughout the world, there are rising health care costs and an overall worsening of population health.”
Retirement Planning Is Not Always Prioritized
In addition to rising health care costs, workers in the U.S. are still not saving enough for retirement. It’s recommended that employees retiring at age 65 have eleven times their final pay to maintain their standard of living. However, only 22 percent of full-career contributing employees are estimated to achieve the required amount by age 65. This outcome may be an issue that starts early, before reaching retirement age — in fact, 57 percent of all Americans have less than $1,000 in savings to help pay for medical expenses, according to a GOBankingRates survey. While the same research shows that adults aged 65 and older are better at saving then younger adults (37 percent of the over 65 group reported having $1,000 or more in savings compared with 27 percent of the 18 to 24 age group), perhaps it’s no surprise then that medical debt is the number one cause of bankruptcy in the U.S.
Aside from medical care savings, financial stability and retirement planning are challenges across age groups. For example, more than 50 percent of millennials are overwhelmed by debt and feel intimidated by financial matters, such as student loans. Roselyn Feinsod, senior partner, U.S. Regional Practice Leader, Retirement, Aon, says “Many millennials starting in the workforce are dealing with the basics of budgeting and cash flow. Saving for retirement and health expenses are not in the forefront of their minds, and we will see the effects of that later as they struggle to retire with adequate retirement income and to pay medical expenses.”
Baby boomers don’t fare much better; the average amount projected to be in their employer-sponsored retirement plans is, on average, 2.6 times short of their expected pay at age 65.
The Impact of Financial Wellbeing on Work Performance
At first glance, an employee’s poor personal financial planning may not seem to be something an employer should worry about. But lack of financial stability can have an outsized effect on employee performance.
The good news, according to Grace, is that employers are now contemplating how they can make an impact beyond simply being a provider of benefits. “Employers are increasingly considering the intersection between physical and financial health and how they can help their workers’ improve their overall wellbeing. How people invest in themselves today – from saving for retirement or planning for health care – is important in ensuring the best results for both physical and financial wellbeing tomorrow.”
Companies that are proactive in helping current employees manage their finances may alleviate some health benefit costs down the road. In fact, obesity, a health issue related to an unhealthy and sedentary lifestyle, is expected to be the top risk factor in future medical claims in the United States. Retirees who retire with adequate retirement resources could therefore cost their company less, even if they live longer than expected.
The Impact of Poor Health
Research by Aon cites the top risk factors expected to determine future medical claims in the U.S.: physical inactivity, poor nutrition and obesity. Throughout the globe the findings are similar: high costs of poor health, and consequently, high health care costs, are forcing employers to reconsider how they plan for health benefits both for current and future employees.
Respondents to Aon’s Global Medical Trend Rates survey offer examples of programs that could help companies get in front of rising medical costs. For example, detection programs, such as screening and check-ups or wellness interventions, can alleviate employer spending on health care.
The Future of Health and Wealth
Saving for retirement while focusing on today’s health care needs – and associated costs – may often compete for attention alongside many other demands, such as credit card debt, home purchases or even unplanned medical expenses. Further, employees who manage to achieve financial stability can be upended by a major unplanned cost, which can cause significant stress. In this way, many employees are caught in the cycle of managing financial and physical health – prioritizing a need of today in place of a necessity for tomorrow.
Companies that view health care benefits as a part of a long-term continuum and proactively work with employees on their financial wellbeing and retirement planning could reap benefits in the form of lower health care spending – and a healthier, more engaged and financially confident workforce.