Continued Erosion of Retiree Health Benefits Likely: Study

September 16, 2002 ( - Employer cuts of retiree health-care benefits are expected to continue for at least another 30 years when companies likely will only pick up 10% of the costs.

That was a key finding of a new Watson Wyatt study, Retiree Health Benefits:  Time to Resuscitate, which also found that few workers are ready to pick up the extra benefits cost when they retire. In fact, the study said, they are so unprepared that they may have to postpone their retirement date,

Large employers now typically pay more than half of total retiree’ medical expenses. But increasing health care costs are forcing companies to scale back how much they are willing to offer, the Watson Wyatt report said.

The Watson Wyatt report blames the erosion of employer-sponsored retiree health benefits on several factors including:

  • escalating health care costs
  • growing retiree populations
  • uncertain business profitability
  • federal regulations that discourage employers from pre-funding retiree medical benefits.

Of the companies surveyed, the report found that about 20% of employers have already chopped retiree medical plans for new hires and 17% will require new hires to pay the full premium for coverage, the report said.

According to Watson Wyatt, employers are cutting health benefits to future retirees by:

  • reducing average employer premium contributions from 80% for current retirees to 60% for future retirees.
  • imposing stricter minimum service requirements for workers to receive benefits. In 1984, nine out of ten large employers offering retiree medical benefits to workers over 65 required five or fewer years of service.  Last year, only about one-quarter offered benefits to workers retiring with five or fewer years of service.  For future retirees, only 14% allow workers to qualify for benefits so quickly.
  • Tying the employer’s portion of the premium to the workers’ length of service at retirement.  For current post-65 retirees, 32% had adopted service-related contributions, but 72% of employers do so for future retirees.
  • Capping the amount companies will pay toward annual retiree medical premiums. About half (45%) of employers cap contributions for new hires while 39% do so for current employees.  Only one in four employers cap contributions for current retirees.  The median employer contribution cap of $2,000 for current post-65 retirees drops to $1,740 for future retirees; the median of $4,450 for current pre-65 retirees drops to 3,900 for future retirees.

According to the study, as more companies reach their contribution caps, retirees will be forced to pay a much larger share of health care premiums from their own pockets.

And given the recent resurgence in health care inflation, virtually all plans with employer-spending caps will hit the caps within the next five years.  Currently, half of post-65 retiree plans with caps and 42% of pre-65 retiree plans have already reached them.

The study is based on benefit plans of 56 large employers with at least 5,000 employees.