Philadelphia Reflections

The musings of a physician who has served the community for over six decades

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Expanded Health Savings Accounts

New Overfunding an HSA to Supplement Retirement Income

Independence Blue Cross (of Philadelphia) has imaginatively designed a Health Savings Account product for retirement purposes, by allowing the employer to overfund an HSA with $750 annual contributions, looking ahead to the employee's retirement. They should be given credit for a good idea. Whether this supplements health insurance before retirement, is apparently left up to the employee, but of course, it supplements any other after-retirement arrangements the employee may have.

Since employers may soon face a requirement to provide health insurance, the high deductible from the government plan is used, to supply the high-deductible requirement for the HSA alone. This seems an efficient way to address present uncertainties and could provide the basis for compromise discussions between the two political parties on the whole subject of fringe benefits. High-deductible is good; adding subsidies confuses the intent. Keep them separate.

Overfunding is always a good idea for subscribers to HSA, whatever their other program features. Politicians hate overfunding, so private is better than public. The program is so new, and its time periods so distant, that unintentional gaps in coverage are always possible. If worries proved unfounded, overfunding would just lead to more money for retirement, hardly a tragedy.

Over-investment in Health Savings Accounts -- The Retirement Alternative. Because it's a new program, with financing uncertainties, we advise everyone with an HSA to consider overfunding it as a precaution. Just about everyone could readily use resulting surpluses for some of his retirement. Although the employer only donates $750 per year, the law allows a total of $3350 as a maximum, and so a $2600 personal supplement is required in the following three hypothetical but typical situations. Example One. An employee starts the program at age 21 and remains with the company until retiring at age 66, contributing $3350 per year to the HSA. It makes no difference whether the employee rises through promotions or remains at the entry level; the maximum is the same. Result: the employee receives a taxable retirement income from the HSA to IRA transfer of $16,000 per year, with an $825,000 death benefit of the residual. Example Two. Another employee enrolls at age 21 but retires to get married at age 26. At age 66, until death, there is a yearly $3000 retirement income, with a $238,000 death benefit of the residual.

Example Three. An employee joins the firm at age 61 and remains until age 66. His retirement income is $450 per year, with an $18,600 death benefit.

In the examples, the first thing which jumps out is the large disparity between what five years of work will get you, starting at age 21, compared with the almost pitiful amount a person age 61 will get for the same absolute, and maximum allowable, contribution. The difference, of course, is made up out of the income compounded internally for 40 years. And the moral is clear, a small steady investment at an early age is worth far more than the same investment at the end of working life. It costs the employer exactly the same, either way, and he may not realize it. It will depend on what value he places on maturity and experience, as compared with vigor and strength.

The second point revolves around the interest rate being paid. The investment manager, whether in-house or by way of a vendor, is able to earn and should be able to earn, 12% on an index fund of the common stock of the whole American market. Inflation at a steady rate of 3% for a century, reduces that return to 9%, net of inflation. How much is the customer entitled to? If he is paid less than 3%, he is actually losing money on the exchange. If he is paid 7.5% gross, he only receives 4% net of inflation, in spite of surrendering half of the net gain (4.5% of 9%) to the broker or manager. In this example we have arbitrarily assigned him 6.5%, which is 3.5% net of inflation, yielding well over half of the margin to the broker. I have to wonder whether the services provided are really worth more than 1% (for example, one nearby trillion dollar firm only charges a tenth as much), so it seems as though a fair return to the investor/subscriber would be 5%, net of inflation, net of fees, or 8% gross.

That means the price debate ranges between 3% (no profit to the investor at all) and 8% (substantially the wholesale price). Throughout this book, I have generally adopted 6.5% as an average, mainly to be safely conservative and avoid arguments. The marketplace will eventually settle on the "right" price, but if it's less than 3.5% net of inflation, it's less than a quarter of the wholesale price. Eventually, I expect the price to be knocked up to 8%, net of inflation, or 11% gross. The ultimate effect of this price pressure on the cost of health care would be considerable, indeed. Sustainable retirement would come into sight, and as we have mentioned, the price of healthcare is linked to it.

Now, I don't want to be accused of starting a revolution, but my calculator tells me if the passive investment could achieve 11% income return, the first of the three examples cited above would receive a retirement income of $363,572.00 per year. The youngster who worked five years and then quit could look forward to a pension of $149,160.00 per year, with an estate of $1,136,000 waiting for him when he dies. Something tells me this is too destabilizing to be allowed to happen, so I'm not going to get impaled on the barricades to achieve it. Ultimately, it probably reflects the reduction of transactional costs by electronics which has not yet worked its way through to retail consumers. So, one way or another, something is going to happen, and it's up to all of us to make sure it is benevolent.


Originally published: Friday, August 07, 2015; most-recently modified: Friday, May 24, 2019