Out in the Cold

When LTV Corp. filed for bankruptcy it yanked health-care benefits from 76,000 of its retirees. A federal judge temporarily restored the funds, but that hardly settled the issue: What happens to retirees’ health benefits when their former employer goes broke? Congress, awash in a sea of red ink, is not likely to bail out the bankrupt. But it can protect the retired from losing their health insurance.

There is some dispute as to whether companies may unilaterally terminate health benefits for their former employees. In any case the federal government does not guarantee retiree health benefits as it does pensions. Many retirees whose plans have been axed find new, usually more expensive, coverage. But some are unable to get new coverage because of previous health problems. Medicare helps, but covers less than half of average medical needs. And for those who have opted for early retirement it does nothing at all.

Few companies fund their retiree health-benefit plans in advance because there are few tax incentives to encourage them to do so. So if a company goes bankrupt it may have little to spend on its retirees’ health. There is nearly $100 billion in unfunded liability in retiree health-insurance plans. Skyrocketing medical costs for the retired have compounded the problems of financially troubled companies. Indeed, the financially troubled industries--steel, for example--typically offer the greatest retiree health benefits. The problem is likely to grow as does the ratio of retirees to workers and of medical care itself.

There are no cheap and easy solutions. Ideally, the government could insure retiree health-care plans as it does pensions. But that would be costly. Though theoretically self-supporting, the federal agency that now insures pensions against bankruptcy is nearly bankrupt itself. A similar program for health-care benefits would be just as expensive. Under such a program, companies would have to contribute annually to their retiree health funds. That would be feasible only if coupled with big tax breaks, which could cost billions. Congress is in a miserly mood, and will not likely amend the tax code to provide such incentives. Trying to force companies to prefund their benefit plans, moreover, could encourage many to cut back coverage or drop it altogether.

But there are two things that Congress can do. One is to amend federal bankruptcy law to give retirees, like creditors, a claim on the assets of a company in bankruptcy. That would help ensure that if a bankrupt company can pay, it will. The other is to allow retirees of bankrupt companies to retain their health-insurance plans without lapsing as long as they pay the premiums. Retirees might have to dip into their pensions to pay for health care, but that would certainly be cheaper than new health insurance.

These are not ideal solutions, but, given ecomomic and political realities, they are the most realistic. Congress can’t prevent companies from going bankrupt, but it can help ensure that those who were promised benefits as employees won’t be left out in the cold.