The Disappearing Benefit

    Again and again, retirees asked the same question:

    " ‘Are we going to have a health plan?’ Their No. 1 concern was accessibility," says Posey, president of the Sears Atlanta Retiree Club. "No. 2 was price."

    In September, the verdict came down: The new company, Sears Holding Corp., would continue to provide health coverage to 45,000 Sears Roebuck retirees. But retirees under age 65, about 6,800 people, would have to start paying full price until they reached Medicare eligibility, and possibly beyond that time.

    With companies facing seemingly relentless cost pressure, the once ironclad promise of retirement health security continues to erode. The question is not whether the benefit shrinkage will continue, but to what extent, industry observers say. Even some unions are making concessions.

    This month, members of the United Auto Workers ratified a deal with General Motors that company officials said would reduce retiree health care liabilities by roughly $15 billion, although the automaker didn’t release any specifics about benefit changes.

    And if retiree health coverage does survive, what form will it eventually take? Competitive pressures, litigation efforts and the new Medicare prescription drug benefit all may play a role.

    From 1997 to 2002, the percentage of retirees younger than age 65 with health benefits declined from 39 percent to 29 percent, according to the nonprofit Employee Benefit Research Institute. Among Medi­care-eligible retirees, the percentage declined from 28 percent in 1997 to 25.5 percent in 2002.

    At Sears, officials offer a familiar litany of pressures in their accounting for the cuts: rising health care costs, increased competition from global rivals and the wave of baby boomers nearing retirement. Last year, the bill for retiree health care comprised 17 percent of Sears Roebuck’s operating income, according to company officials.

    Posey, who at age 63 is among those affected by the premium increase, sounds almost grateful. "Retirees were really expecting the worst--to the point that we wouldn’t be offered anything," he says.

    In addition to boosting retiree contributions, some companies have eliminated coverage for specific groups, such as an employee’s dependents. Others are trying creative solutions. Last year, Toledo, Ohio-based Whirlpool launched a savings account mechanism for future retirees.

    Still, there are several wild cards in this rapidly shifting landscape.

    Litigation efforts continue. Retirees of Lucent Technologies filed a suit in October alleging that the company illegally eliminated coverage for some retirees’ spouses. Lucent spokeswoman Joan Campion says company officials believe they are in compliance with the law, but she declined to otherwise comment on pending litigation.

    Meanwhile, Medicare’s recent introduction of a prescription drug benefit may--depending upon the perspective--either bolster the existing benefit system or, ultimately, spur employers to drop coverage now that a more generous Medicare alternative is available.

    So what do companies risk when they take a chisel or an ax to long-standing benefits? For frustrated retirees, there’s often not much legal recourse, as long as company health plans include some language allowing the firm to make modifications, says Laurie McCann, an AARP attorney.

    Neither is recruitment likely to be stunted if benefits are cut for future retirees, says Paul Fronstin, director of the health research and education program at the EBRI. "Workers don’t value retiree health coverage," he says. "They aren’t thinking about it. They are thinking about health benefits for right now."

    Company leaders must be prepared, though, for some stagnation in their corporate ranks if they trim the golden parachute down to a rip cord, Fronstin says.

    "People may not leave their jobs because they don’t want to lose their health benefits," he says. "You could have more deadwood."

Eroding benefits
    Fronstin and other experts in the field say that the latest benefit erosion is just a continued reverberation from accounting changes implemented in the early 1990s. At that time, the Financial Accounting Standards Board started requiring companies to project retiree health costs forward for future years, creating sticker shock as company leaders were forced to come to grips with the size of their long-term health liabilities.

    "I think in all cases it (the cost of retiree health care) was a much larger number than companies had ever focused on before, since they simply looked at the actual expenses for the current year," says Paul Dennett, vice president of health policy at the American Benefits Council in Washington, D.C., which advocates for Fortune 500 companies. "It was a major seismic shift in both thinking and accounting for retiree health benefits."

    Increasingly, businesses have moved to cap their contributions. By 2004, 54 percent of companies had imposed caps on at least one retiree plan, according to the latest retiree benefit survey by the Kaiser Family Foundation and Hewitt Associates. The joint survey analyzed results from 333 companies with 1,000 or more employees.

    Caps help employers continue to offer coverage but limit their financial exposure, says Michelle Kitchman Strollo, a Kaiser senior policy analyst and one of the report’s authors. But, she says, "retirees begin to pick up more costs as medical costs rise above that predetermined amount."

    According to the Kaiser/Hewitt joint survey, a worker who retired before age 65 would pay 27 percent more in premiums for 2004 compared with 2003. The increase was similar--24 percent--for Medicare-eligible retirees.

    Sears officials are aware of the financial stresses on retirees and are taking steps to assist them, including holding informational meetings at about 30 locations across the country, spokesman Chris Brathwaite says.

    "We continue to think this new Sears plan is more generous than most, while allowing Sears to adapt to the market in a meaningful and thoughtful way," he says.

    These days, the American landmark that launched the classic mail-order catalog has plenty of company. Aetna has started phasing out its subsidy for 16,000 retirees and dependents. Beginning in 2004, the Hart­ford, Connecticut-based company decreased its subsidy per retiree by 25 percent annually, spokes­man Fred La­berge says. Aetna employees who retire after 2007 will be offered retiree coverage but must pay the full amount--a less expensive option, he notes, than purchasing a similar policy on the individual market.

    Lucent, which covers 200,000 retirees and dependents, has made some changes in recent years, primarily aimed at management retirees, according to spokeswoman Campion.

In January 2004, the Murray Hill, New Jersey, company eliminated the subsidy for the dependents of management retirees who retired after March 1990 and earned at least $87,000. This year, they changed the salary cutoff, affecting dependents of management retirees who had earned at least $65,000.

    When Edward Beltram retired from Lucent in 2001, he and his wife, Sherry, realized their dream of leaving Denver’s hectic city life for a peaceful mountain home. Beltram was entitled to a good pension package and enjoyed relatively low health insurance costs--$142 per month for the two of them, which made it feasible to build a new home.

    Beltram’s idyllic retirement changed dramatically when Lucent decided not to subsidize health insurance payments for the dependents of retirees whose annual salaries exceeded $65,000.

    Today, he pays $516 per month for health care coverage. By next year, when his monthly bills soar to $690, his insurance payments will surpass his mortgage payments. He has had to take on a contract position at a local retiree network organization to help make ends meet.

    "Promises were definitely broken," Beltram says. "Lucent is building profitability on the backs of retirees."

    Whirlpool officials decided earlier this year to start charging a monthly $20 premium for the company’s basic retiree plan, effective January 2006, says Janice Pushaw, director of global benefits strategy at Whirlpool. Retiree premiums for the other plans will increase about 10 percent.

    The company covers about 14,000 retirees and dependents.

    Whirlpool officials wrestled for months over whether to charge the $20 premium, Pushaw says. "It was an incredibly hard decision," she recalls. "But at the end of the day, we all believe in shared responsibility."

    Posey, the Atlanta retiree, says Sears’ changes mean he’ll pay an additional $100 to $250 monthly in 2006 depending upon which plan he selects. As a former district general manager, he says he can absorb the increase.

    Because he retired before 2000, he will be eligible for a subsidy again once he reaches Medi­care age. Nearly two-thirds of the existing pre-65 retirees will be similarly eligible, Sears spokesman Brathwaite says.

    But some retirees on fixed incomes don’t have room in their checkbooks for ongoing premium hikes, says Bill Payne, a Pittsburgh attorney who is representing retired U.S. steelworkers in several ongoing cases. "The premiums they (companies) are imposing on them will often take away their pension benefits and then some," he says. "They are charging these people $10,000 a year in some of the cases I’ve seen."

Practicing innovation
    In 2003, Whirlpool officials announced a new approach for covering health benefits for future retirees. The new accounts, called retiree health care savings accounts, operate in practice more like a company-backed IOU. Beginning in January 2004, Whirl­pool opened an account for every employee over age 40, depositing a $2,000 credit for each year of Whirlpool employment beginning at age 40. Each year, an additional $2,000 is credited to the employee’s account.

    The credits are not real cash. But if the employee retires with Whirl­pool, the credited money can be used to cover up to 80 percent of the health care premiums, Pushaw says. The remaining premium, along with whatever costs the accumulated credits don’t cover, would be the retiree’s responsibility.

    Through this approach, Whirlpool is able to continue to provide health benefits to future retirees while limiting its own financial exposure in the years ahead, Pushaw says. With retiree health liabilities growing at "an astronomical rate," she says, "we had to do something to stem the tide."

    Are tomorrow’s retirees braced for less of a safety net? Not necessarily, says Fronstin, who points to two sets of Employee Benefit Research Institute figures aligned on a collision course. According to one analysis, nearly half of today’s workers, 47 percent, expect to receive retiree health benefits. But according to another analysis, only one-fourth of retirees currently have any coverage.

    Whether Medicare’s prescription drug benefit will stall the benefit slide remains a matter of some debate. In the past, employers often felt obligated to offer older retirees health coverage to assist with costly prescriptions, says Mike Morfe, vice president of the Health & Welfare Practice at Chicago-based Aon Consulting.

    "Now with the new drug benefit, employers can reasonably tell their (65-plus) retirees, ‘You now have a full spectrum of benefits available to you in the individual marketplace,’ " Morfe says.

    But the Kaiser/Hewitt survey’s data indicates that the tax-free subsidies available to companies that continue to offer prescription drug coverage are slowing any rush to the exits, the American Benefits Council’s Dennett says.

    In 2004, 58 percent of companies said they would continue covering prescriptions. Kaiser’s Strollo says preliminary results indicate a similar trend for 2005.

    Even so, company officials like Pushaw choose their words carefully as they discuss the future of retiree health benefits. "I don’t really want to say ‘commitment,’ " Pushaw says. "I don’t really say ‘promise.’ But we do feel a responsibility to our employees and to our retirees."

    With all of the variables involved in retiree health benefit plans, no matter how hard employees and company leaders search for a clear vista, they are certain to find the view murky in the days ahead.