Investor’s Business Daily - July 11, 2005

General News

Retirees Losing Health Benefits, Creating Huge Financial Burden
BY PAUL KATZEFF
 

INVESTOR'S BUSINESS DAILY

General Motors (GM) made a lot of workers feel ill with its recent declaration that it must slash costs by cutting health benefits. The auto giant said it could save up to $20 billion a year on outlays for retirees.

GM's warning was just the latest blow to health benefits for retirees in all industries nationwide.

Consider Mike Sellers, who retired from Lucent Technologies (LU) in 1999. His former employer was so flush that it paid 100% of Sellers' family health benefits even though it had promised to pay no more than 90%.

Then the technology boom went bust. So did Sellers' health subsidy. Starting in 2001, his monthly out-of-pocket premiums rose in yearly steps.

This year, his monthly premiums hit $605. That's 20% of his total pension.

"The worst part is the uncertainty," Sellers said. The 57-year-old former sales executive says the unexpected cost hikes have thrown his retirement finances out of whack. "I'll probably get hit with future increases. I just don't know how big or when."

More and more businesses are cutting how much they help retirees cope with health costs.

In 2002, 13% of Medicare-eligible retirees — people ages 65 and older — had health benefits from former employers in the private sector. That was down from 20% in 1997, according to a March study by the Employee Benefit Research Institute (EBRI).

Even among big businesses, retiree health coverage has plunged.

Only 56% of companies with at least 1,000 workers offered retiree health benefits in 2003. That was way down from 80% in 1991.

"There will be additional erosion in the percentage of big businesses that offer coverage," said Paul Fronstin, head of the health research and education program at the EBRI. "There will be a bigger falloff in how much companies contribute. And they will cut back eligibility for retirees and their families. And companies will terminate more benefits for future retirees."

Still, starting in 2006, Medicare will unveil its new private prescription drug program.

But many retirees fear their former employers will use Medicare's expanded drug benefit as an excuse to cut back on benefits.

"Corporate retiree benefits are more generous than the Medicare drug benefit is likely to be," said Tricia Newman, who directs the Kaiser Foundation's Medicare policy work. "So retirees are afraid of losing their workplace coverage."

The situation is already getting worse. Among large firms polled by the Kaiser Family Foundation and Hewitt Associates:

€ 79% increased retirees' health premiums in 2004.

€ 53% boosted co-pays for prescription drugs, and 49% said they would in 2005.

€ 37% raised deductibles, and 43% said they would this year.

€ 8% ended company contributions to health plans for future retirees.

€ 11% plan to end coverage for future retirees no matter who pays.

"Retiree coverage will cease to exist as we know it," Fronstin said.

The share of large firms — those with 200 or more workers — offering retiree health benefits dived 45% from 1988 to 1993, found a survey by Kaiser and the Health Research & Educational Trust.

One cause was a 1990 rule change by the Financial Accounting Standards Board. Starting in 1993, most companies had to show the future costs of retiree health benefits over employees' working careers rather than wait and book them on a pay-as-you-go basis after workers retire, according to Hewitt Associates.

That meant health care liabilities could cut into current profits.

Few firms want to risk that.

Ultimately, the culprit is soaring health costs and longer life spans. From 2000 to 2004, health insurance costs for workers surged 59%.

Retiree health benefit costs rose 12.7% just last year for firms polled by Kaiser and Hewitt.

A typical worker age 65 or older who retired in 2004 would pay $2,508 in premiums for himself and a spouse. That's up 24% in one year.

And that's only the tip of the health cost iceberg.

 

Retirees Face Huge Expenses

 

Suppose you retired at age 65 in 2004. By age 80, you'll need $72,000 to pay for health care, says the EBRI's Fronstin.

That's how much it would take to pay for the costs of medical insurance, Medicare Part B premiums and $1,500 yearly in out-of-pocket expenses, all rising 7% annually.

If costs rise 10% a year — and if you live to 100 — you'd need a staggering $1.47 million.

And that's if you're lucky enough so your old employer lets you buy coverage through its health plan.

"Most people are going to fall far short of their needs," said Scott Spiker, chief executive officer of Destiny Health, an Oak Brook, Ill., firm that sells health coverage to small and midsize businesses.

Many people think once they're eligible for Medicare, their problem is solved. But the program's coverage is limited. And Medicare as well as Medicaid are practically on life support themselves.

 

Medicare No Safety Net

 

Medicare faces a $28 trillion shortfall in the next 75 years, according to Thomas Saving, an economics professor at Texas A&M University and a trustee of the Medicare and Social Security Trust Funds. That chasm is more than fivefold bigger than the projected 75-year deficit for Social Security.

So Medicare offers no guaranteed fallback position to retirees, especially future ones. And if Medicare is shored up through skyrocketing taxes, it'll make it harder for people to save for future health care needs.

"People will have to get by with far less coverage from all sources than they expect," Spiker said.

People may also want to delay retirement. That would let them stay in their current health plan. Even if they take a new job, that could help pay for coverage.

Another alternative is to boost private savings.

Workers can start socking away big bucks in tax-favored health savings accounts. But you can use an HSA only if you take health insurance with huge deductibles and other limitations.

"They can also make lifestyle choices to preserve their health," Spiker said. "That's not a bad thing either."


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