Employers Chip Away at Retiree Health Benefits
Geraldine Picha knew that her pension would be modest, given her tenure of just 15 years at the phone company.
What she did not expect was that her retiree health premium would eat up every penny of that pension -- and more.
“It’s frightening,” said Picha, 63, whose former employer has raised her medical insurance bill steadily since she retired in 1998. At $560 a month, it now eclipses the $514 pension check Picha earned from her years at what was then AT&T; Corp. and a spinoff, Lucent Technologies Inc.
Picha, who lives near Chicago, remembers when a job at a big company meant “you were taken care of the rest of your life.” But as retirees across the gamut of American industry are discovering, those days are ending.
Just as they are cutting back on pensions, employers are increasingly targeting health benefits as a way to save money, saddling older people with costs that companies used to accept as a routine part of business.
Over time, some maintain, growing legions of the elderly will find themselves with thousands of dollars in additional costs -- posing difficult personal choices over care and new pressures on a federal government that already faces a vast, uncovered liability for the old-age needs of the baby boom generation.
“Across the board, retirement benefits are on the chopping block,” said Daniel D. Doyle, an attorney for former Monsanto Co. employees whose benefits shrank after their division was spun off and filed for bankruptcy protection. “As companies try to restructure and squeeze out shareholder value, they are going to rely more and more on Medicare and other government programs to fill the breach.”
Retiree health benefits first took a big hit more than a decade ago, when new accounting standards required companies to more clearly disclose those costs -- prompting many employers to trim their offerings. More recently, the benefits are falling victim to rising healthcare expenses and corporate cost cutting.
On average, retirees account for 29% of the corporate medical bill for large employers that offer such benefits, according to Hewitt Associates, a benefits consulting firm. And like other medical costs, those for retirees have risen steadily -- as much as 10.3% from 2004 to 2005, according to a survey of large private employers by the Kaiser Family Foundation and Hewitt.
Retiree medical benefits are now offered by just 1 in 3 large employers, down from 2 in 3 in the late 1980s, according to a study by the Kaiser foundation and the Health Research & Educational Trust.
For those that still provide such benefits, past commitments are being scaled back, and even steeper cuts are in store for future retirees. General Motors Corp. last fall announced a plan to save $15 billion in future healthcare liability for its retirees, for the first time charging retirees from hourly jobs a range of out-of-pocket costs for their medical needs.
“The double-digit cost pressures have been relentless,” said Frank McArdle, head of the Washington research office of Hewitt Associates. “In many years, the annual increases for retiree healthcare have actually been greater than for active employee healthcare.”
Such realities may provide little comfort to people who thought they earned the benefits when they were working and counted on them for security in old age.
“I thought I was going to live the good life,” recalled Pete Wilson, 69, who took early retirement from Peoria, Ill.-based Caterpillar Inc. in 1992. He bought a 30-foot trailer and traveled the Southwest with his wife and friends. He even withdrew home equity, taking out a loan on his paid-off home, bolstered by a faith that his medical costs would never be a burden.
But last year, Caterpillar began charging Wilson $125 a month for his medical insurance premium. This year the bill jumped to $172. There is talk of future increases, Wilson said, although the company declined to confirm it. His medical bills continue to mount, most recently for a mysterious weight loss Wilson’s doctors are trying to pin down.
Medicare covers most of the costs for Wilson and other Americans 65 and over. But patients are required to share Medicare costs for doctor visits, hospitals and prescription drugs, potentially exposing themselves to thousands of dollars in bills.
Private insurance helps, but it doesn’t cover everything. Wilson recently had to pay $88 toward a magnetic resonance imaging procedure. His budget, meanwhile, has been strained by other expenses, such as a new furnace and air conditioner.
“We can’t go to Arizona anymore,” said Wilson, whose pension from his 33 years at the factory is about $1,000 a month.
He still speaks with pride of his former employer, a manufacturer of earthmoving equipment that reported a record $1.05 billion in profit for its most recent quarter. Still, he has some misgivings about how the company is sharing the riches.
“It looks to me like they could kind of take care of some of these people who were there at the beginning,” he said.
Caterpillar spokesman Rusty L. Dunn declined to discuss Wilson’s case but said the company viewed affordable healthcare as “something we owe our retirees.”
At the same time, he pointed out that medical costs had been soaring and that Caterpillar was under competitive pressure throughout the world.
“We’re not cutting back,” Dunn said. “But we are looking at ways under today’s realities to share some of the burden.... Failure to make prudent, market-based adjustments would be irresponsible. We feel we would be jeopardizing the competitiveness of the company.”
In many cases, younger workers will bear the brunt of workplace benefit changes when they reach old age.
By the time younger workers reach retirement, many will find that healthcare subsidized by their employer is no longer available. Between 2004 and 2005, 12% of large firms said such benefits would be unavailable for future retirees, the Kaiser-Hewitt survey found, with similar findings reported in other recent years.
Such future-oriented cuts “have a snowball effect,” McArdle said. “When you first do it, you’re not affecting many people. Over time, it affects more and more.”
When Geraldine Picha retired in 1998, her health insurance cost about $345 a month, or about 67% of her monthly pension check. But today, the former secretary has to devote all of her pension and more to health insurance.
“As a stockholder, it makes sense to me,” Picha said. “As an employee, it’s painful.”
Picha, who has diabetes, recognizes that her healthcare benefit remains valuable. A private insurance policy, she said, might cost $900 to $1,000 a month.
This month Lucent shareholders approved a $10.7-billion merger with Alcatel, a French communications giant that in the past has cut back healthcare benefits for its U.S. retirees. “You’re left up in the air,” Picha said. “Will your medical insurance continue?”
Alcatel and Lucent declined to predict the level of benefits.
Until now, millions of public-sector employees have largely been spared the squeeze on retirement benefits. But that may soon change.
Under an accounting standard to be phased in by late 2008, cities and states will be expected to clearly outline their long-term financial commitments to retiree healthcare, echoing the 1990 standard that sparked the pullback by corporations.
“Many public-sector entities are going to find themselves in a significant shortfall,” said Ralph P. Craviso, senior director of workforce effectiveness for Yale University’s human resources department. “This is not a problem that can be solved by increasing tax revenues. The solution lies in reducing the level of benefits.”
None of this is good news for the baby boom generation.
“As these costs are shifted, the ability of retirees to access healthcare will be compromised, and that will result in pressure on the federal government,” Craviso said. “Then it will become a national political issue. I believe it is a crisis in waiting.”