Retirement Insights -- Endangered 'Species'

By Karen Gilgoff

Sometimes it seems as though employer-paid retiree health coverage is an endangered species. Workers and retirees have to fight like mad to protect it — just as environmentalists fight to save the spotted owl or bald eagle from extinction.

Why is retiree health care in danger? The simple answer is that it's become increasingly expensive. Costs have been rising an average of 18 percent a year, driven largely by the growth in prescription-drug spending. Drugs now account for 40 to 60 percent of employers' overall cost for post-65 retiree health care.

Senior citizens use lots of prescription drugs. Although only 13 percent of the U.S. population, seniors use 34 percent of all drugs dispensed. And the costs are soaring. Drug prices have gone up more than 300 percent since 1983 — three times the rate of general inflation.

In light of these figures, it's hardly surprising that many employers are trying to cut back on benefits, shift costs to retirees or eliminate retiree coverage entirely.

Health benefits at risk

In the public sector, even employers with a history of providing strong retiree-health care benefits are trying to make cutbacks. States such as Hawaii and Illinois have been hit by a combination of high health care costs and tight budgets, and AFSCME has had to fight hard to contain the potential damage to retirees.

But the situation is even worse in the private sector. According to a 2001 survey, retirees currently pay all or part of the cost in eight out of 10 large-employer health care plans. Compare that to 15 years ago, when half of large employers paid the full premium.

In addition to rising costs, private employers must contend with the rules of the Financial Accounting Standards Board, a watchdog group that sets accounting guidelines for companies. In 1990, for the first time, the board required companies to show the full cost of their retiree health care benefits on their financial reports — including all benefits promised to future retirees.

With retiree health care costs projected to rise as much as 34 percent annually in the years ahead, the new rules mean some companies must reveal millions in future expenses. Financial obligations of that magnitude can easily scare off stockholders and affect stock prices.

So it's no wonder that companies are looking at every possibility for shaving costs. Some are eliminating retiree health coverage for new hires. Others are looking at setting caps on how much they'll spend on retiree health care each year.

Think this couldn't happen in the public sector? Well, accounting rules similar to those of the accounting board are currently being established for state and local governments. As a result, the financial reports of public employers may also have to reveal future obligations for retiree health care benefits. The costs could alarm taxpayers and bond investors, just as they've alarmed corporate stockholders.

More danger ahead

AFSCME is one of a group of public employee unions that is trying to stave off trouble by calling for modification of the proposed rules. The group cites findings of the federal General Accounting Office (GAO), which concluded that the accounting board's rules "may have acted as a catalyst for reduction in retiree coverage." Some day, unless the unions succeed in easing the accounting rules, the GAO may say the same about public-retiree health care coverage.

"Clearly, employers' health care pressures are mounting, and it's turning into an explosive situation," says Pres. Gerald W. McEntee. "They need some relief — not only from these accounting standards, but also from the high cost of prescription drugs.

"If Congress would just enact a comprehensive Medicare drug benefit, employers could get some help in meeting their fastest-rising health cost. It would not only preserve their retiree drug plans, but would go a long way toward maintaining the complete package of employer-paid health insurance that so many AFSCME retirees enjoy."

Passing Medicare drug coverage and finding ways to reduce the price of prescription drugs, McEntee emphasizes, are "top AFSCME priorities."