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August 17, 2001
Report: Benefits Will Shrink More
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The report, produced by the nonpartisan Employee Benefit Research Institute, notes that the trend is not that apparent to current retirees because the courts have ruled that an employer has a right to terminate or amend retiree health benefits only if it has proved that such a right has been reserved or stated in specific language and on a widely known basis.
Partly as a result, retiree health benefits are being restricted in many cases by making it harder for workers to qualify for them.
"While these trends do not appear to be having much impact on current retirees, they are likely to be felt most by future retirees, who are not yet or may never become eligible for retiree health benefits," said EBRI President Dallas Salisbury.
He added: "Rising health benefit costs, court rulings, and potential federal legislative initiatives may create new incentives for employers to review their retiree health benefits."
The report, "Retiree Health Benefits: Trends and Outlook," focuses particularly on coverage among individuals ages 55-64, or the so-called "near-elderly."
It says the current trend toward cutbacks in retiree health benefit programs began more than 10 years ago, as a result of more stringent accounting standards required by the Financial Accounting Standards Board, a private-sector organization that establishes standards for financial accounting and reporting.
In December 1990, FASB issued Financial Accounting Statement No. 106 (FAS 106), which required most private companies to significantly alter the way they account for their retiree health benefits. In essence, the rule required companies to record unfunded retiree health benefit liabilities on their financial statements in accordance with generally accepted accounting principles.
Because FAS 106 requires employers to accrue and expense certain future claims' payments as well as actual paid claims, it dramatically impacted companies' calculation of their profits and losses, and thereby created a strong incentive for financial managers to limit expenses.
More recently, a major age discrimination case involving the Erie County, Penn., municipal government has many employers considering reviews of the health benefits they offer to retirees age 65 and older (who are eligible for Medicare coverage), compared with benefits offered to "early" retirees younger than 65. Adding to pressure on employers are spiraling health insurance costs and proposed legislation in Congress that would prohibit them from changing or reducing certain retiree health benefits.
Among the report's findings:
-- As a result of FAS 106, and the increasing cost of providing retiree health benefits in general, many employers began a major overhaul of their retiree health benefit programs. Some employers placed caps on what they were willing to spend on retiree health benefits. Some added age and service requirements, while others moved to some type of "defined contribution" health benefit. Some completely dropped retiree health benefits for future retirees, while others dropped benefits for current retirees, although this has happened less frequently than the other changes.
Despite FAS 106, most 55- to 64-year-olds are covered by some form of health insurance: In 1999, 67 percent were covered by employment-based health benefits, nearly 9 percent purchased health insurance directly from an insurer, more than 16 percent were covered by some form of public health insurance, and 14.5 percent were uninsured.
-- Federal age-discrimination laws and regulations, as most recently interpreted by federal courts in the Erie County case, may create new incentives for employers to review their retiree health benefits.
-- Adding to the pressure on employers are various bills currently pending in Congress that would mandate that they either continue to offer retiree health benefits once they are offered or prevent future changes in the benefit programs.
-- The changes that employers have made to retiree health benefits will likely have a greater impact on future retirees. These changes may not have noticeable effects on trends in insurance coverage until a few years after the post-World War II baby boom generation starts to retire.
-- Retirement behavior patterns may also change as employees nearing retirement age postpone their decision to retire on learning that, without a job, they may not be able to obtain health insurance coverage.
-- Retirement behavior patterns may also change as employees nearing retirement age postpone their decision to retire on learning that, without a job, they may not be able to obtain health insurance coverage.
EBRI is a private, nonprofit public policy research organization based in Washington, DC. Founded in 1978, its mission is to contribute to, to encourage, and to enhance the development of sound employee benefit programs and sound public policy through objective research and education. EBRI does not lobby and does not take positions on legislative proposals.