Health Care Costs Darken Sunset Years

Through the first half of the 20th century, a long and comfortable retirement was something few workers experienced. Pensions were not common, Social Security was just getting started, and anyway, most workers died on the job or shortly after retiring.

Then things changed. Social Security flowered. Unions extracted better pensions and other benefits from employers. New federal laws made if difficult for employers to renege on promised benefits and provided government-backed insurance for pensions if employers went broke.

Now, that latter period, especially the years from about 1975 to 2000, is beginning to look like the golden age of retirement in America. In other words, those were the good old days, and if you're still working, there's a good chance you've missed out.

The retirement that looms for many of today's workers is likely to be quite different. While some will still have that magic combination of Social Security, a private pension, a 401(k) and company-sponsored retiree medical insurance, their numbers are shrinking steadily.

The conclusions of experts who study the situation are depressingly uniform. Retiree medical insurance is fading fast. Private pensions -- the kind that provide a lifetime stream of income -- have declined drastically over the past two decades, though they are slipping more slowly now. Social Security's future is problematic, and workers are not doing well in their 401(k)s.

The do-it-yourself trend in retirement -- and the low participation in 401(k) and similar plans -- is the heart of the problem, and has been getting some attention lately. But not widely appreciated is the impact of the disappearance of retiree health insurance.

A new study finds that medical costs can equal 20 percent of pre-retirement income for a worker who retires at 65 and who has no employer health care benefits. In other words, a worker who has savings and pension income adequate to replace all of her pre-retirement income is really 20 percent short of that unless she has some form of employer medical subsidy. And that assumes Medicare eligibility. Workers retiring early without employer medical are projected to have only 59 percent of pre-retirement income left after medical expenses.

The study, by Hewitt Associates, a benefits-consulting firm based in Lincolnshire, Ill., notes that other research indicates that retirees need to have enough resources to replace 85 to 90 percent of their pre-retirement income to maintain their standard of living.

Hewitt found that only workers who have the entire package, including a traditional pension and retiree medical, seem likely to reach that level.

Those who have only a 401(k) and Social Security start off at 80 percent of pre-retirement income and go down from there, depending on whether they have employer medical and how generous it is. In fact, the study projects that retirees with only Social Security and a 401(k) and no employer medical benefits will be left with only 57 percent of their pre-retirement income to live on.