Retiree Health Coverage An Endangered Species

General Motors highlighted yet again the erosion of retiree health benefits among U.S. employers when the automaker disclosed in its recently filed annual report that reducing retiree health costs was critical to its turnaround plan.

In the report filed with federal regulators, GM called its $68 billion employee and retiree health care obligations “the source of our largest competitive disadvantage.” In January, the company joined other Detroit automakers by capping retiree benefits. GM also is seeking additional concessions from the United Auto Workers union, whose contract expires in September.

The promise employers once made new employees to pay for retiree health benefits continues to disappear, according to a new study published by Watson Wyatt and the National Business Group on Health. Less than one in five employers today offer a defined retiree health care benefit to new employees, the study notes. And just 15 percent of employers plan to follow General Motors and offer limited financial assistance to new hires when they retire, the report states.

“Large companies have been eliminating retiree medical benefit coverage for new employees at an accelerated rate for a number of years,” says Ted Nussbaum, director of health care consulting in North America for Watson Wyatt, “to the point that only 18 percent of companies that provide retiree health benefits do so for new hires.”

The promise of retirement with secure health care instead has morphed into an offer by employers to help retirees pay for health insurance, give them access to cheaper premiums or do nothing for them at all. Thirty percent of employers said they would offer no financial support to future retirees but would provide access to less expensive group coverage premiums that individuals would otherwise be unable to secure.

Meanwhile, 37 percent of the 573 companies representing 11 million employees interviewed for the study said they plan to provide no financial help to new hires during their retirement.

CNH Case New Holland, a Racine, Wisconsin-based heavy equipment manufacturer, is among the employers that have eliminated retiree health care benefits for new hires and instead restructured their current health benefits to allow employees to save money for retirement health care costs using a combination of health reimbursement and health savings accounts.

If a person saves the maximum annual amount under current law—$2,850—and earns 7 percent annually, they will only save $155,000 in 20 years. Retirement health costs are formidable, says Jay Savan, a senior health care consultant with Towers Perrin, and most people aren’t prepared.

“You will need $600,000 if health care costs grow at the rate they are growing now,” he says.

Other employers, like Cleveland-based financial services firm National City, also have eliminated defined health benefits in favor of capped financial assistance that would help retirees eligible for Medicare to supplement their coverage, says David Repko, health and welfare manager for National City. Soon more retirees will rely on Medicare, as will employers who want to stop covering their retired population.

The Medicare trust fund is expected to be drained by 2018, according to the U.S. Government Accountability Office. Repko puts total Medicare obligations at $30 trillion and growing.

“It’s a number that’s going to come home to roost,” he says, “on us and on our children.”

Such a time could come sooner as more employees face a retirement without company-provided health care.

Jeremy Smerd