CHICAGO — Most of the recent coverage about retiring has focused on the recall squabble between Ford Motor Co. and Bridgestone/Firestone, which hasn’t meant much to executives looking forward to their upcoming retirement years — unless, of course, they own an Explorer.
But William M. Mercer Inc. has some survey data about health benefits that should be of considerable interest to baby-boomer-era managers. Mercer, one of the nation’s leading human resources consulting firms based in New York, has data showing that fewer of the country’s large companies have offered health benefits to new retirees in recent years.
According to the Mercer annual survey of large companies, 46 percent offered health benefits to new retirees in 1993. But by 2000, only 31 percent of those reporting firms were still making the coverage available to employees 64 and under. Why the drop?
Well, it doesn’t take a memory expert to recall that health-care costs rose annually by double digits for many of those eight years.
So the expense of providing coverage to former employees who would no longer be pulling their weight became a major factor. In fact, another Mercer study showed that companies that cut back retiree packages also cut their plan’s expense by an average of 27 percent. A few were even able to slash those expenses in half by taking that action.
But there is slightly more to the explanation than just the obvious higher cost of coverage and expense reduction.
One subtlety is competition.
The global marketplace often pits U.S. companies in direct competition with foreign firms that have lower labor costs and may not offer any benefits to current workers, let alone past employees. Also, if a strong competitor, even one located next door, doesn’t offer a package, a company that does may drop it in order to level the playing field of cost.
Another is mergers. When two companies blend into one and only one of the two offers health benefits to retirees, the probable outcome is that the consolidated company won’t offer that coverage. Firms merge to reduce expenses and create efficiencies, and expensive benefit packages for future retirees most likely aren’t on the expense sheet.
A third is bookkeeping. Accounting laws have companies posting some future expenses in the present.
“What happens for these people who are working today is companies actually have to record some expense today for benefits they’re going to give them in the future,” said Derek Guyton, a principal in the Chicago office of Mercer Inc.
“Companies, by eliminating benefits for future retirees, can actually have a big impact in reducing their current expense today. That’s why they do it. It’s not necessarily a cash cost. Even though they do monitor and watch their cash cost-flow closely, it’s these non-cash costs for future retirees that probably get the most attention,” he added.
And the trend to cutback health benefits for future retirees is expected to continue.
“Yeah, I think we expect that to continue,” said Guyton.
So what’s a Baby Boomer to do? Well, those closest to retirement have less to worry about than younger boomers. Guyton said that when firms drop health benefits for future retirees coverage is usually continued for those who have almost earned their gold watches.
Besides, managers in their early 60s can get coverage from COBRA when they turn 63 ½. Then they can buy a supplemental plan from AARP or Blue Cross Blue Shield when they qualify for Medicare. Doing this may cost more than a company plan, but the benefits will be there.
But how about those who are planning an early exit from the workforce or are at least a decade away from buying a Winnebago and touring the Grand Canyon? Should they count on having their health package in place then?
“I wouldn’t,” said Guyton, who is also an actuary. “My company has it, but I still save money anticipating that I may have to get my own coverage someday.”
Retiring before 65 and finding coverage is tough. Even if someone saved to buy coverage at, say, 62, it will be expensive to buy an individual plan.
But there may be some light at the end of the workplace tunnel for future retirees, especially those who are in relatively good shape and are willing to take a risk.
Catastrophic policies with higher deductibles are starting to gain appeal. For instance, a policy may have a $1,000 deductible and have a policy owner pay 10 to 20 percent of the next $5,000.
“That holds down the cost of the insurance, and it puts more onus on the employee because they’re paying out of their own pocket for the first thousand dollars,” said Guyton.
“For companies, it makes the benefits cost a lot less. But also, hopefully, in the long run, it makes people better consumers of health care because they are more connected to the financial decisions about health care than they are today,” he added. “The coverage becomes more like true insurance. How many people have homeowner’s insurance or auto insurance with $10 deductibles? Nobody does.”