Rude Awakening on Health Costs : Workplace: Large firms are now being required to write down liability for retiree benefits. The numbers are shocking many.
When General Motors recently revealed that the health care costs of its retired employees would slash up to $24 billion from its earnings--a figure roughly equivalent to its entire net worth--American businesses heard the biggest single thud yet of health care costs hitting the bottom line.
And the echo is telling young American workers: Your benefits will be skimpier than your parents’. The snowballing future cost of keeping baby boomers healthy in old age is coming out of the dark closet of corporate fear, loathing and let’s-cross-that-bridge-when-we-get-there.
A new federal accounting requirement is bringing the huge burden into the light of day by requiring large companies to publicly put that future liability on their current books starting in 1993. Even small companies will have to list that liability starting in 1995.
Until now, companies kept their books on a pay-as-you-go system, noting liabilities for retiree health benefits only when they were actually paid out. While some large corporations have been wrestling with the burden of retiree health burdens for some time, smaller and younger companies may be in for an unhappy surprise when they get around to figuring their own liability, accountants say.
Eileen Raney, a partner at accounting and consulting firm Deloitte & Touche, says her Southern California clients have been shocked to find their retiree health care liabilities “tremendously” bigger than they believed.
GM is the biggest corporation so far to quantify the cost to meet the new requirement, saying it could range from $16 billion to $24 billion. The company said it had not decided whether to account for the cost in a single charge, or spread it out over up to 20 years. Earlier, IBM said it would put a one-time, $2.3-billion charge on its books for the same reason, and Chrysler has estimated its costs at $4 billion to $6 billion.
For all U.S. firms, that burden of providing health care to current and future retirees now totals $335 billion for their lifetimes, according to the federal General Accounting Office. That’s more than the $311.6 billion that U.S. corporations earned in total in 1989.
While spiraling health care costs continue to gnaw at corporate profits, they will also eat away at worker incomes. Corporations are fighting unions and employee resistance to shift more health and retirement costs onto workers.
“Certainly, today’s younger workers can anticipate that the level of benefits provided when they retire will not be as generous as they are today,” Raney says.
Companies will leave employees more on their own in their retirement, but they will also help workers prepare for that time by helping them set aside more savings--both pretax and after-tax--through 401(k) plans and other programs, she says.
The cost of retiree benefits will hit companies hardest in the Rust Belt, where unions helped ensure generous benefits. In Southern California, where a large percentage of workers are employed by banks, retailers and other service companies that tend to have relatively skimpy benefits, the burdens will be smaller.
In Southern California, excluding the public sector, about 25% to 30% of companies offer retiree health benefits, and another 25% to 30% are subsidizing those benefits “even though they think they aren’t paying for it,” according to Raney. That second group will have to list their subsidy under the new accounting rule. Aerospace companies will have huge retiree bills--as will high-tech companies, once their younger workers start to retire. The generous benefits these companies use to attract the best and brightest engineers will cost them dearly down the road.
The burden of retiree health benefits varies tremendously by industry. In some young high-tech companies, revenue generated by 500 employees may support just four retirees, but in Rust Belt manufacturing, Raney has seen companies struggling to support 12,000 retirees on the backs of 6,000 active employees.
In aerospace, the ratios are better than in some other manufacturing sectors. At Hughes Aircraft, for example, there are 60,000 active employees to about 19,000 retirees. But as people live longer, the same number of active workers is likely to be supporting a much larger group of retirees, actuaries say.
Retirees, because they are older, tend to use more health care services than active employees. Raney finds the annual health care expenditures for large companies she’s surveyed average $2,800 per active employee. But the cost jumps to $6,000 for a retiree between 55 and 65. Above age 65, the figure drops to $3,500 because Medicare picks up part of the tab.
However, even with Medicare’s help, retirees’ health care can cost companies a lot. At Arco, for example, the cost of providing health care for all retired workers now stands at half the cost for active workers. But costs for over-65 retirees are growing faster than those for active employees largely because of their use of expensive prescription drugs, according to spokesman Scott Loll. Corporations are asking more and more employees to contribute to their medical plans, even before they retire. About 75% of single employees of companies surveyed in 1991 were required to pay part of the premium for their health insurance coverage, compared to 58% in 1987, according to a survey by Wyatt Co., a benefits consulting firm. About 93% of employees with families were required to contribute in 1991.
The total cost of employers’ medical plans has increased at three times the general rate of inflation over the past four years.
Companies that haven’t yet figured their retiree health care costs are looking closely at GM’s announcement. AT&T;, which spends $3 million a day on health care for its 325,000 employees, has not yet calculated what its future retiree health expenditures will be, spokesman Jim Byrnes says. “The GM announcement makes people sit up and take notice,” he says. “The clock is ticking toward 1993.”
