What Obamacare Means for Corporate Retiree Insurance Coverage

The news that Time Warner and IBM are changing retiree health-insurance benefits has some claiming the moves are proof that the Affordable Care Act (ACA) is drastically eroding the employer-based health-insurance system it promised to preserve and increasing costs for retired corporate workers in the process.

In truth, corporate America was already looking for ways to trim health-insurance costs, particularly for retirees, long before Obamacare came along. The benefit decisions announced by IBM and Time Warner have little direct relationship with the health care law and will not, as some have suggested, leave retirees without any insurance.

The changes at IBM relate to supplemental health benefits for retirees who already receive Medicare through the federal government. Rather than administer these additional benefits for company retirees over 65, IBM will direct former employees to a Medicare-specific insurance exchange, or marketplace, and subsidize the cost of this extra coverage. Retirees will have to participate in choosing their supplemental plans, but will ultimately have more options, according to IBM. Time Warner, the parent company of TIME, will give retired employees too young to qualify for Medicare subsidies in order to purchase coverage on their own through private exchanges that are separate from the public insurance exchanges that will open Oct. 1 as part of the ACA.

Nationwide, companies have been making similar changes for many years. According to the nonpartisan Kaiser Family Foundation, in 1988, 66% of companies with 200 or more employees that offered insurance benefits to active employees also offered retiree health benefits. By 2008, two years before the ACA became law, the figure had dropped to 29% and is currently 28%, according to Kaiser. In 2009, a year before the ACA was signed, Xerox eliminated supplemental health benefits for retired workers who qualified for Medicare. The decision drew a lawsuit from retirees, but a federal judge ultimately ruled that the group had no legal claim against the company. “It had nothing to do with Obamacare,” says James Marino, a lawyer for the Association of Retired Xerox Employees, which filed the lawsuit.

Although Obamacare is not directly responsible for corporations cutting back and altering benefits for retirees, the law won’t do much to slow this trend. In fact, it could indirectly increase costs for companies that might, in turn, look to retiree benefits to cut spending. The law sets a minimum floor for what medical care health-insurance plans must cover. Although many corporate health-insurance plans were grandfathered in and exempted from complying with these requirements, the exemption disappears if companies make significant changes to their health-insurance offerings, which is common. Architects of the law say it will reduce the growth of overall U.S. health care spending and costs for individual medical treatments and procedures, which could reduce costs for employers, but it will be years or even decades before this promise can be evaluated on the merits.

And with the law’s public health-insurance exchanges scheduled to launch in just a few weeks, companies can point to them as viable alternatives to company-sponsored retiree coverage. Retirees in their late 50s and early 60s who don’t yet qualify for Medicare and are generally sicker than their younger counterparts currently face some of the highest health-insurance premiums in the individual marketplace. Under the ACA, insurers will no longer be able to charge these people higher rates based on health status, but the law does allow premiums to be set by age. Insurers will be able to charge the oldest enrollees in any given health plan three times as much as the youngest enrollees.

Still, for similarly aged retirees without any subsidies from their former employers — like those who worked independently or for small businesses — the Obamacare exchanges, which will offer public subsidies to low- and middle-income Americans without job-based coverage, could give the first real chance at finding affordable health insurance.

Survey: The 5 Biggest Retirement Saving Mistakes

Saving for retirement shouldn’t be a guessing game. It should begin with your first job and in most cases not stop until you are collecting Social Security. Yet millions of people struggle to do anything at all, and still more make glaring mistakes.

To help you get started and avoid common traps, Four Seasons Financial Education, a financial wellness and education provider, has identified the top five retirement mistakes of employees at its client companies:

• Over-relying on rules of thumb. Simple rules can be instrumental in getting a worker started saving early and putting them on the right path. Saving 10% of everything you make is better than being paralyzed and shooting for eight times final salary — and definitely better than having no goal at all. But rules can get you into trouble, too. The presumed 4% safe withdrawal rate in retirement is anything but perfect, and retirees with a traditional pension have far different savings needs than those without one. Use rules of thumb as a guidepost and to get started. But at some point you need a customized plan.
• Going too conservative at retirement. As you age, you should gradually reduce portfolio risk by tilting more towards bonds. The previous point notwithstanding, a useful rule of thumb is subtracting your age from 110 to arrive at the percentage of stocks you should own. You may feel old at 65 but you may also live another 30 years. You will need stocks for growth if you expect your nest egg to last that long. Asset allocation is among the most important aspects of retirement planning to get right. If you want to keep it simple, consider a target-date mutual fund which adjusts automatically.
• Taking Social Security benefits early. Although changes may occur with the Social Security system it will remain viable for many years and probably be a meaningful part of your retirement income. Your monthly benefit jumps 8% every year you delay filing between ages 62 and 70. For a lot of people, waiting to 70 and living to age 83 is the break-even point, and everything they collect from then on is a bonus.
• Failing to use a retirement calculator The web has many useful online tools and since your retirement may last 30 year or longer you need all the help you can get. Computers are a tremendous aid. Don’t guess. Some of the best tools can be found at CNNMoney, T. Rowe Price, Fidelity, Schwab and BlackRock.
• Cashing out retirement assets early Financial planners and policymakers have long puzzled over how to prevent leakage from 401(k) accounts as workers quit jobs and fail to roll over all their assets into an IRA or similar account. The temptation is mighty; especially if you have debts you want to retire. But with taxes and penalties this is a costly move. The money you saved over five years might require 10 to replace.

How to Get the Most from Social Security

One of the biggest mistakes retirees make is getting their Social Security benefits wrong—taking them too early or too late, or failing to coordinate with their spouse. Miscues in this area can cost thousands of dollars over the course of a retirement.

In one respect, mistakes are understandable. Getting every dollar you are eligible to receive can be painfully complicated. The economist Larry Kotlikoff, an authority on maximizing Social Security benefits, estimates that a 62-year-old couple must, before they reach 70, choose from over 100 million possible combinations in terms of precisely when to take benefits and make various adjustments.

In another respect, though, getting Social Security seriously wrong is inexcusably negligent. The typical retiree counts on Social Security for 70% of his or her income. About one in four retirees has no other ready source of funds, and in the 401(k) age even those with a decent nest egg may have no other stream of guaranteed lifetime income.

The good news is that for the vast majority of retirees, getting the calculus right on Social Security should be easy. It only gets complicated in a handful of relatively unusual situations: 1) when spouses of very different ages both have earned income and one income is significantly larger than the other; and 2) when you want to keep working late in life.

The basic rule is to delay benefits to age 70 if at all possible. That way you get the highest possible monthly payout, which will keep coming for as long as you live. You become eligible for early but reduced benefits at age 62 and full benefits between 65 and 67, depending on the year you were born. But for every year that you delay taking full benefits, the monthly payout you eventually receive increases until age 70, when you max out your income stream.

Consider someone born in 1937. Their normal retirement age was 65 (true for anyone born before that). If they started collecting at 62, they got just 80% of their full monthly benefit. But if they waited to age 70 they got 132% of their full monthly benefit. The math is similar at all age groups. Those born in 1960 have a normal retirement age of 67 (true for anyone born after that). If they choose to collect at age 62 they’ll get just 70% of their full benefit but if they wait to age 70 they’ll get 124%.

These are meaningful differences. The typical monthly benefit today is around $1,200. That would mean a 76-year-old who took early benefits is getting $960 a month while one who waited to age 70 is getting $1,584. Schwab figures that by the age of 81 a top-earning retiree who delayed benefits comes out marginally ahead, and everything they receive the rest of their life is a bonus. The math is a little different for everybody; your beak-even may be age 83 or 84. You can estimate your break-even point with an online calculator.

A lot depends on your health. If you are in poor health, it may make sense to start collecting as early as possible. If you and your partner are in decent shape, however, you stand a good chance of one or both getting past the break-even point. Your main consideration should be whether you could get by on savings and other income until you reach age 70 — but if the answer is yes, the safe bet is to assume you or your spouse will live long enough to benefit from the near-term sacrifice. As Kotlikoff writes: “Social Security benefits are an insurance policy against one of life’s most expensive accidents: failing to die on time. Unless you or your partner has a terminal condition, you probably should figure on living to 100 for the simple reason that you might.”

Once you’ve considered delaying, the next big planning point for couples is managing spousal benefits. A lower earning spouse is entitled to three types of benefits: one based on his or her own earnings; a benefit equal to half the higher earning spouse’s benefit; and a survivor benefit equal to the higher earning spouse’s benefit after he or she dies.

A common strategy is to begin collecting the lower-earning spouse’s benefit early but delay the higher-earning spouse’s benefit to age 70. This gives you some income now and will max out the biggest benefit. It also ensures that the second to die will be left with the highest monthly income stream possible from Social Security.

But there is no cookie-cutter approach. You might also be better off filing for benefits at normal retirement age, triggering the spousal benefit for a low-earning partner, and then suspending your own benefits until age 70. This is the kind of complex strategy that can stretch income but probably requires the eye of a professional. Couples can get more timing tips here. In general, it’s also a good idea to postpone early benefits for as long as you have income from a job above $15,120.

Perhaps the biggest trap to avoid is thinking that you should grab what you can while it’s still there. Social Security is projected to have all the funds it needs for at least two decades. So relax. You have time. Yes, sorting it all out can be complicated. But the basic rules will work for most people.