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September 17, 2002
Retirees' Benefits in Danger
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Employer financial support will shrink to less than 10 percent of total retiree medical expense by the year 2031, under plan provisions already adopted by many employers, Watson Wyatt found in a survey. Today, large employers typically pay more than 50 percent of total retiree medical expenses.
"The net result of skyrocketing medical costs and public policy has been to render retiree health benefits economically irrational," says Sylvester J. Schieber, Ph.D., vice president and director of research at Watson Wyatt and one of the study's co-authors. "The burden on future retirees to pay their own medical costs is increasing dramatically, and far too few employees are prepared for these looming changes."
Many employers have already reduced or eliminated retiree health benefits, and Watson Wyatt research shows that the trend will only accelerate as health-care costs climb. Twenty percent of the employers studied have eliminated retiree medical plans for new hires altogether; 17 percent will require new hires to pay the full premium for coverage. Other employers are capping their contributions, linking contributions to the retiree's length of service or imposing stricter minimum service requirements for future retirees.
The Watson Wyatt study blames the erosion of employer-sponsored retiree health benefits on several factors, including escalating health-care costs, growing retiree populations, uncertain business profitability, and federal regulations that discourage employers from pre-funding retiree medical benefits.
The study is based on detailed analysis of data from nationally representative surveys of the population and employers, augmented by an examination of actual plan characteristics from a sample of 56 large employers with at least 5,000 employees.
According to Watson Wyatt's analysis, employers are cutting health benefits to future retirees by:
- Imposing stricter minimum service requirements for workers to receive benefits. In 1984, nine out of ten large employers that offered retiree medical benefits to workers over 65 required five or fewer years of service. Last year, only about one-quarter offered benefits to workers retiring with five or fewer years of service. For future retirees, only 14 percent allow workers to qualify for benefits so quickly.
- Tying the employer's portion of the premium to the workers' length of service at retirement. For current post-65 retirees, 32 percent had adopted service-related contributions, but 72 percent of employers do so for future retirees.
- Reducing average employer premium contributions from 80 percent for current retirees to 60 percent for future retirees.
- Capping the amount companies will pay toward annual retiree medical premiums. About half (45 percent) of employers cap contributions for new hires while 39 percent do so for current employees. Only one in four employers cap contributions for current retirees. The median employer contribution cap of $2,000 for current post-65 retirees drops to $1,740 for future retirees; the median of $4,450 for current pre-65 retirees drops to $3,900 for future retirees.
According to the study, as more companies reach their contribution caps, retirees will be forced to pay a much larger share of health care premiums from their own pockets. And given the recent resurgence in health-care inflation, virtually all plans with employer-spending caps will hit the caps within the next five years. Currently, half of post-65 retiree plans with caps and 42 percent of pre-65 retiree plans have already reached them.
"Our research shows that most all employers have made changes that limited their retiree medical liabilities in one way or another," says Joe Martingale, Watson Wyatt's national leader for health care strategy. "The effect of these changes for future retirees may be dire."
Averting a crisis
To avert a looming crisis, the Watson Wyatt report proposes that employers, employees and policymakers join in a concerted effort to preserve medical benefits. "To control costs, employers and federal policymakers must enlist the forces of consumerism, manage high-cost cases and identify best practices in the treatment and use of medical technology," says Dr. Schieber. "Additionally, retirees will have no choice but to assume greater responsibility for planning for medical costs during their retirement, including consideration of increased personal savings and even delayed retirement."
The authors also propose that Congress allow employers to fund retiree health benefit plans under tax incentives similar to those governing pensions today. A better framework and incentive for funding retiree medical benefits would mean better benefit protection for retirees and their families.
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