Justices allow cuts to retiree benefits

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Times Staff Writer

The Supreme Court on Monday gave employers a green light to reduce health benefits for millions of retirees who turn 65 and become eligible for Medicare. The justices turned away a legal challenge from AARP, the nation’s leading senior citizens lobby, which had contended these lower benefits for older retirees violated the federal law against age discrimination.

The court’s action upholds, in effect, a rule adopted last year by federal regulators that says the “coordination of retiree health benefits with Medicare” is exempt from the anti-age-bias law.

Advocates for companies and labor unions openly disagreed with AARP and applauded the outcome. They said this compromise rule will encourage employers to maintain health coverage for their retirees. Otherwise, employers might drop all benefits for their former employees, they said.


They said it will prove especially helpful to those younger retirees who were offered continued healthcare when they left full-time work.

In 2004, a survey cited by AARP found 49% of retirees age 55 to 64 had health insurance coverage from a former employer. Benefits experts for private employers say the proportion is lower. A survey in 2005 found only 13% of those who retired from private companies were promised continued healthcare.

Employers in California, large and small, say benefits for retirees already have become a casualty of soaring medical costs.

“In some cases, it’s become a millstone around their necks,” said Jack Kyser, chief economist of the Los Angeles County Economic Development Corp. “Corporations aren’t all heartless, but in many cases, you’re competing with multinational corporations that don’t have quite the obligations that domestic firms have.”

A survey completed this month by the Employers Group found that 10% of California firms with 300 to 600 employees offered health coverage to retirees, and 5% of firms with 100 to 300 employees.

The legal dispute highlights what some say is a gap in the law. Employers are not required by law to pay for health benefits for their employees or their retirees. And in most instances, they are free to change their benefit policies or to drop coverage they had previously offered.


Over the last decade, many employers have pulled back from providing these continued benefits to their retirees because of the high cost. But until Monday it had been unclear whether it was illegal to use a worker’s age -- in this instance, 65 -- to trigger a reduction in benefits.

“This is good news because it clears up the lingering doubts about the law,” said Rae Vann, general counsel for the Equal Employment Advisory Council, which represents large companies. “From a practical point of view, it is also good for retiree health benefits. It means more employers will continue to provide these benefits.”

Bill Raabe, director of collective bargaining for the National Education Assn., agreed that employers needed the freedom to adjust benefits for retirees who qualify for Medicare. “The practical effect of any law that requires employers to provide identical benefits for pre- and post-Medicare-eligible retirees would be the erosion of post-retirement healthcare benefits for all,” he said.

AARP, which claims 39 million members, said it was “deeply disappointed” by the court’s rejection of its appeal. It predicted the decision will encourage more cutbacks by employers. The court’s action “clears the way for employers to discriminate by reducing or terminating benefits for older retirees simply because they’ve turned 65 years old,” AARP said in a statement.

David Sloane, AARP’s senior vice president, said the court battle shows a need for Congress to take up healthcare reform. “We have an entirely voluntary system” where employers provide healthcare if they choose to, he said. “This is the fundamental problem we are dealing with. One way to solve the problem would be for Congress to pass comprehensive healthcare legislation.”

Monday’s one-line order from the high court ends a legal battle that stretched over eight years. It began when retired county workers in Erie, Pa., won a ruling in 2000 that barred officials from reducing their health benefits when they reached 65. The U.S. appeals court in Philadelphia said this amounted to illegal age discrimination.


That ruling set off alarms among employers. Many had devised benefit policies that provided “bridge” coverage until their workers reached 65 and qualified for Medicare.

This nearly became a national rule when the Equal Employment Opportunity Commission moved to adopt it as federal policy. However, after studying the issue, the agency reversed course in 2003 and concluded that this all-or-nothing benefits rule would create an incentive to cut benefits for retirees, not raise them.

The law permits the EEOC to adopt “reasonable exemptions” to the federal anti-discrimination laws if doing so will promote the “public interest.” The agency proposed a “narrow” exception to the anti-age-bias law to permit employers to coordinate their health benefits with Medicare.

In 2005, AARP sued to strike down the exemption adopted by the EEOC. The senior citizens lobby was opposed by a broad coalition of groups, including the U.S. Chamber of Commerce and major unions that represented teachers, autoworkers, firefighters and government employees.

Last June, the U.S. court of appeals in Philadelphia, also reversing course, upheld the EEOC’s new policy as legal and reasonable. “Over time, it will likely benefit all retirees,” the three-judge panel said.

AARP appealed to the Supreme Court, arguing that 10 million retirees 65 and older could be threatened with lower benefits since they are eligible for Medicare.


On Monday, the justices dismissed the appeal in AARP vs. EEOC without comment.



Times staff writer Molly Selvin in Los Angeles contributed to this report.