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Bush's HSA proposal hinges on dubious premise

WASHINGTON—President Bush's proposed expansion of Health Savings Accounts depends on a premise that research shows is questionable: that Americans want more financial choices in their lives.

Experts point to a lack of participant activity within 401(k) plans as a sign that many Americans already feel overwhelmed by financial options. The 401(k) experience points to both the risks of HSAs and the road ahead for health-care management.

Bush proposes to offer tax breaks to individuals who set aside pre-tax dollars in HSAs to pay their medical expenses. These HSAs are linked to high-deductible insurance plans, where consumers agree to pay higher upfront expenses in exchange for lower premiums than they'd pay in a traditional employer-based plan.

The theory behind these HSAs, said Allan Hubbard, director of the president's National Economic Council, is that "as people spend more money over which they have discretion, they're going to be concerned about spending it wisely."

Armed with knowledge of true health-care costs, they'll be more discriminating consumers. That would lead overall health care spending to drop and, over time, insurance premiums would fall, too.

Do Americans, as Hubbard suggests, really want to shop for a cheaper doctor, x-ray or blood test?

Research into Americans' behavior with retirement savings plans suggests that they don't. It shows that people, in fact, shrink from such decisions.

In 2004, Hewitt Associates, a global consultant specializing in workforce issues, found that only 17 percent of participants in 401(k) plans had made a single transaction beyond automatic contributions deducted from their paychecks. Only half of eligible workers in their 20s opt into 401(k) plans.

"The average person is not making any choices on a proactive basis, on an annual basis. We have more anecdotal evidence that the individuals are not really sure what the choices are," said Lori Lucas, director of retirement research for Hewitt.

Researchers at the University of Pennsylvania's Wharton School studied the accounts of 1.2 million workers enrolled in more than 1,500 employer-sponsored 401(k) retirement plans. Released a few weeks ago, their study, entitled "The Inattentive Participant," concluded that "most 401(k) participants are characterized by profound inertia."

"What we have learned from 401(k) plans is government and employers have a role in structuring simple choices," said Stephen Utkus, a co-author of the Wharton study. "We know from 401(k) plans that people get confused by choices and not everyone is the active decision maker the government hopes them to be."

So do Americans want more financial choice, or "ownership," as President Bush calls it?

Yes and no, according to Columbia University behavioral economist Sheena Iyengar. She points to research that shows consumers routinely say they want choices, but when presented with too many, they avoid making decisions.

"It's the chicken-and-egg problem. On one hand they want more choice, but on the other they have problems choosing," Iyengar said. "With health care, the obvious issue is that unlike chocolates and jams, no matter what option you pick, it has serious consequences."

Similarly, lack of decision-making about retirement savings also has consequences. Lack of participant activity in 401(k) plans has led more than three-quarters of plan providers to offer so-called Lifecyle funds. These take the choice out of the hands of savers. Instead, the fund invests for them differently at different stages of their lives, more aggressively for younger workers and more safely as they near retirement age.

Comparing retirement-savings choices to HSAs isn't exactly an apples-to-apples exercise. Retirement savings are for the distant future, while HSAs are for more immediate needs. And HSAs work like a checking account, where money goes in and out to pay for medical expenses.

However, for younger salaried workers or wealthier individuals planning early retirement, HSAs can be used as savings vehicles that, like a 401(k) contribution, lower the level of taxable income. Unused HSA contributions grow over time, accumulating year over year.

There's another important parallel, experts say. Today's 401(k) plans emerged from a shift away from defined-benefit pension plans run by corporate managers. Under 401(k) plans, employers pass the burden of managing future retirement savings to their employees. Skyrocketing health-care costs now drive a similar shift with health plans.

"The concept that the employer is going to take care of things is clearly going by the wayside," said Joseph Antos, a senior researcher at the American Enterprise Institute, a conservative research center that's helped foster Bush's HSAs. "We've largely shifted to a defined-contribution approach to pensions. With health care, that's clearly the direction we're heading, for the same reasons."


(c) 2006, Knight Ridder/Tribune Information Services.

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