Big Cuts Coming in Health Benefits for Many Retirees

Martha Lynn Craver
Kiplinger Business Forecasts
Posted November 07, 2005

Employers trying to cut costs are increasingly looking to pare health benefits for retirees, spurred by recent moves in the private and public sectors.

One watershed event is the recent agreement between General Motors (GM) and the United Autoworkers (UAW) union, under which the union agreed that retirees will begin paying a portion of their health insurance premiums.

"The agreement between GM and the UAW is a signal of things to come in the unionized world," says Paul Fronstin with the Employee Benefit Research Institute (EBRI).
Ford and DaimlerChrysler are expected to push for similar reductions, and it will be hard for the union to resist. US Airways, which recently emerged from bankruptcy, sharply reduced benefits for current and future retirees. Delta, United and Northwest airlines, which are currently in Chapter 11, are likely to follow US Airways' lead.

Decreases for retirees in the public sector are also in the offing, Fronstin says. A recent change in accounting rules requires states to put more emphasis on their liability for providing retiree benefits, which will increase pressure to cut back.

Employers, meanwhile, are shifting costs more often to employees and retirees or getting out of the health care business altogether.

While 66% of employers with at least 200 workers offered retiree health benefits in 1988, only 33% provided those benefits in 2005. Those that continue to offer benefits are requiring retirees to pay higher premiums, deductibles and copays and are capping company contributions to the programs.

An increasingly popular approach by employers is to provide "access only." This means that retirees must pay 100% of the cost of coverage, although they will have access to the company's group rates, which usually are lower than individual premiums. Sears recently announced that, starting next year, retirees younger than age 65 will have to cover the full cost of their health insurance until they turn 65.

But more and more firms are simply ditching coverage for future retirees, notifying employees that those hired after a certain date will not be eligible for benefits. According to a recent survey by the Kaiser Family Foundation, one-third of employers have cut off benefits for future retirees in the past three years.

The erosion of retiree benefits is likely to have an impact on the labor supply. More workers are likely to stay in the labor force, especially those who might otherwise take early retirement, because they simply can't get, or can't afford to pay, for health coverage.

"As current trends continue and workers come to understand the true availability and cost of retiree health benefits, they may find themselves unpleasantly surprised by what awaits them in retirement," concludes an EBRI report on retiree health benefits.

Copyright 2005 Kiplinger Washington Editors, Inc.

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