Expectations for Retiree Health Benefits Decreasing

October 23, 2012 (PLANSPONSOR.com) – More workers are realizing they will not get retiree health care from their employer after they stop working, according to a report by the Employee Benefit Research Institute (EBRI).

“The data show that workers are still more likely to expect retiree health benefits than retirees are actually likely to have those benefits, but the expectations gap is closing,” said Paul Fronstin, head of health benefits research at EBRI. “By 2010, 32% of workers expected retiree health benefits, while only 25% of early retirees and 16% of Medicare-eligible retirees had them.”

The report found that while many employers no longer offer retiree health benefits, most that have continued to do so have made changes in the benefit package they offer: raising premiums that retirees are required to pay, tightening eligibility, limiting or reducing benefits, or some combination of those. Increasing retiree contributions tops the list of likely future changes among employers that still offer the benefit. Forty-three percent of employers say they are very likely to increase the retirees’ portion of premiums next year, and 35% are somewhat likely to do so.

Because employers are under no obligation to provide retiree health benefits—except to current retirees who can prove that they were promised a specific benefit, and because (unlike defined benefit pension plans) employers are not under any obligation to pre-fund retiree health benefits—it is likely that employers will continue to make changes to those programs, especially for future retirees, EBRI noted.

The study also found that very few private-sector employers currently offer retiree health benefits, and the number offering them has been declining. In 2010, 17.7% of workers were employed at establishments that offered health coverage to early retirees, down from 28.9% in 1997. Furthermore, between 1997 and 2010, the percentage of non-working retirees over age 65 with retiree health benefits fell from 20% to 16%.

Earlier research found little impact from reductions in coverage on current retirees, but EBRI found that initial changes employers made to retiree health benefits affected future retirees as opposed to then-current retirees. Over time, more and more retirees have “aged into” those program changes, resulting in the greater effect found in more recent studies.

The full report, “Employment-Based Retiree Health Benefits: Trends in Access and Coverage, 1997-2010,” is available here.