Disappearing Retiree Health Benefits

Editor's note: This article appears in Kiplinger's special issue Retirement Planning.

Are your company-provided retiree health benefits safe? The short answer is no. Soaring health-care costs, the competitive pressures of a global economy and the growing ratio of retirees to active workers are prompting companies to rethink the promises they made to workers about free or low-cost health care for life. And in the face of this troubling trend, workers and retirees have few options but to prepare to shoulder a larger share of health-care costs in the future.

Employers large and small have been scaling back retiree health benefits for years. But a historic tipping point may have come late last year, when General Motors and the United Auto Workers union agreed to alter longstanding precedent and require retired union workers to pay health-insurance premiums for the first time ever. You could almost hear the air hissing out of the tires of the one-time Cadillac of retiree health plans.

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UAW retirees will now pay $10 a month for individual coverage and $21 a month for a family, with annual maximum out-of-pocket expenses for services of $370 for individuals and $752 for families. Retirees will also have higher co-payments for prescription drugs.

Of course, that may seem like a bargain to the majority of American retirees who don’t have employer-provided health insurance. They must fend for themselves if they retire before Medicare kicks in at age 65 and, after that, cover the costs that Medicare doesn’t. About one-third of retirees rely on their former employers to fill some of Medicare’s gaps, such as deductibles and co-payments, and 21% buy private medigap insurance. But for those auto workers who thought they were guaranteed free health-care benefits for life, GM’s switch is a crushing blow.

The GM-UAW deal is just the latest (and the largest) in which companies have announced, or revealed that they were considering, reductions in retiree health insurance. The list reads like a hall of fame of corporate America, including companies such as Delta, Lucent, Sears and US Airways. Analysts say the GM agreement opens the door for DaimlerChrysler, Ford and other large companies to cut costs by reducing health benefits for retirees and current workers.

A growing trend. The Kaiser Family Foundation’s annual survey of 2,000 employers illustrates the continuing trend away from employer-sponsored health insurance. In 2005, only 33% of large firms (with 200 employees or more) offered retiree health coverage; that’s half as many as offered those benefits back in 1988.

Last year alone, 12% of large firms stopped offering subsidized retiree health benefits for future retirees, mainly newly hired workers. And over the past four years, more than 125 major firms terminated health-care coverage for future retirees.

Among the large firms that still offer retiree benefits, virtually all—94%—offer benefits to early retirees. But a smaller percentage—only 81%—offer benefits to Medicare-eligible retirees, preferring to shift the cost to the federal government. Early retirees get hit the hardest when health benefits are reduced or eliminated because they do not qualify for Medicare.

“Based on current trends, we can expect that fewer retirees will have health coverage in the future and that those who do will be paying more for health care,” said Drew Altman, president and chief executive officer of the Kaiser Family Foundation.

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Shrinking benefits. To deal with escalating health-care costs, employers have adopted a number of strategies in recent years that shift expenses directly to retirees—through higher premiums, bigger co-payments, and larger annual deductibles and maximum out-of-pocket payments.

According to a survey conducted by the Kaiser Family Foundation and Hewitt Associates, the average total premium for a Medicare-eligible worker who retired with employer-provided health insurance in 2005 was $4,080. Of that, the retiree paid $1,536 a year toward his or her premium, and the employer paid the remaining $2,544. The retiree’s share was about 10% more than what a similar retiree paid in 2004.

At one extreme, the survey found that nearly 20% of firms required new Medi-care-eligible retirees to pay the full cost of premiums for their retiree health insurance coverage, essentially providing them with access to an unsubsidized group plan. For most new retirees, that is still a better deal than trying to obtain insurance themselves in the private market. In contrast, 11% of firms still pay the full premium costs for their retirees.

Reality check. So what’s an older worker or a retiree to do? The first thing is to take stock of your vulnerabilities. Former salaried employees, who are not covered by union contracts, are the most at risk for insurance cuts because their retiree health benefits can be reduced unilaterally. Unionized retirees are safer but not completely safe, as the GM-UAW deal shows. And if your former employer goes bankrupt, your retiree health coverage is likely to disappear altogether. The Pension Benefit Guaranty Corp., a quasi-governmental insurer that covers pensions, doesn’t provide protection for health benefits.

If you are still working, should you consider switching to a company that offers retiree health benefits? Not unless you are getting a better job in the bargain. As noted earlier, the odds are not good that rich benefits offered today will be delivered in full tomorrow, and most companies are already changing the rules for new hires. Some employers now offer health savings accounts, which allow employees to set aside pretax dollars to fund health expenses now and after they retire.

If you are already retired and your former employer trims your benefits, consider an all-inclusive Medicare Advantage plan, which offers prescription-drug coverage. In some cases, these new versions of the old Medicare HMOs will provide you with comprehensive health care with minimal or no premiums.

The bottom line: Most current and future retirees are vulnerable to cuts in their health benefits. If you are retired and receiving medical benefits, you should assume they may be reduced in the future—even if they are guaranteed by contract. And if you’re still working for a firm that promises retiree benefits, don’t count on receiving those benefits in their current form.