Tuesday, April 11, 2006

Broken Promises

Broken Promises
By Reed Karaim

With companies cutting back on retiree health benefits, more and more former employees have to go it alone. What lies ahead for today’s workers?

Santos R. Arrona of Visalia, Calif., worked for J.C. Penney for 25 years, mostly in delivery services, before he retired at age 69 in 1990. In addition to a modest pension, Penney provided Arrona with health benefits, including prescription drug coverage. Those benefits were something he thought he could count on from a company founded on its golden rule of fairness, honesty and value.

But last year J.C. Penney announced that, effective Jan. 1, 2006, it would cancel virtually all health benefits for retirees age 65 and over. So Arrona, 84, joined the growing ranks of Americans who have seen their retiree health benefits end or at least deteriorate at an employer's discretion.

Among huge companies that trimmed benefits in recent years are General Motors, Raytheon, Lucent Technologies, United Airlines and Pfizer. The reasons they cite for their retreat include soaring health care costs, cutthroat global competition and even the new Medicare Part D prescription drug plan.

Coupled with countless frozen or terminated pension plans, health benefit cutbacks make plain the growing transfer of economic risk and responsibility from employers and government to workers. To retirees like Arrona, the decisions simply feel like broken promises.

"You're there all those years, you do all the work and everything they ask you to do, and then you retire and they cut you off," he says. "It doesn't seem right."

The number of large companies that provide their retirees with health benefits fell precipitously in 1991, when the federal government imposed stricter accounting requirements for measuring the financial cost of future benefits. The decline has continued, from 46 percent in 1991 to 33 percent in 2005, according to annual surveys by the Kaiser Family Foundation and Hewitt Associates. Smaller firms are even less likely to provide retiree health benefits.

Companies that do maintain benefits have been hiking the share retirees must pay. In the 2005 Kaiser/Hewitt survey, more than two-thirds of the companies reported such increases. More than a third increased copayments, and nearly a fourth increased deductibles.

Millions of retirees are scrambling to adjust. J.C. Penney is helping the 9,500 retirees affected by its 2005 decision move their drug coverage to a Medicare Part D drug plan offered by AARP and provided by United Healthcare. The new coverage, the company says, is better than its old plan.

But when Arrona looked into it, he received contradictory information, and the monthly cost quoted to him by one plan representative—$176 a month for the premium and his three medicines— would badly strain his finances. He is in the process of signing up, but as a veteran, he has in the meantime turned to the Department of Veterans Affairs for his prescription drugs. "I think they're going to be able to help me," he says. "I sure hope so."

At least Arrona qualifies for Medicare. More than 3.5 million retirees don't because they haven't reached age 65, according to the Kaiser Foundation and the Urban Institute, a think tank in Washington. That makes their employer coverage especially critical, and rising costs could strap them.

Ed Beltram of Woodland Park, Colo., worked as a manager for Lucent Technologies for 31 years. When the company downsized four years ago, it asked him to take early retirement at age 56. Part of the incentive was generous health benefits, which, he says he was told, wouldn't be available if he delayed his departure.

Out-of-pocket medical costs for Beltram and his wife were $43 a month when he retired. Now, because of changes Lucent has made in its plan, the Beltrams are spending $690 a month. The increase has changed their retirement; he's working part-time at a golf course to bring in a little extra money.

"We're still all right on the basics," he says, "but we're not doing the things we thought we would do, like traveling to see our sons regularly."

It wasn't what Beltram had been led to expect. "In the years [workers] didn't get much of a raise, we were always told, 'Even though your salary isn't going up as much, you're still accruing your benefits for your retirement years.' " Now, he says, "the companies are supporting their corporate financial reports on the backs of retirees by having accountants and lawyers look every way they can—do whatever is legal—to reduce the benefits. It may be legal ... but I really feel it's immoral."

Companies also take advantage of their contributions to health care for employees and retirees to help the bottom line. They've parlayed the payments into the largest tax break in the history of the U.S. tax code—$102.3 billion in 2004. At the same time, corporate underfunding of retiree health plans dwarfs the better-known shortfalls of pension obligations.

Are cutbacks simply economic reality? "Medical costs are just generally out of line, for current and former employees," says Paul Dennett of the Washington-based American Benefits Council, which represents Fortune 500 companies. "Anytime one area of costs goes out of line, it underscores the need for greater discipline into that area of expenses."

At the same time, Dennett says, increased competition, nationally and globally, has put financial pressure on older firms that offered benefits packages more generous than many newer firms offer. "Very few retirement health plans have been established in the past few years," he says. Many companies, he adds, have no economic choice but to cut benefits.

The changing economic landscape hit home with hourly workers at General Motors, whose health benefits were part of their union contract. They voted last fall to support a change that would cut $1 billion in annual health care benefits for more than 750,000 hourly workers, retired hourly workers and their families.

The deal requires federal court approval because it would force retirees, who didn't have a vote in the matter, to begin paying monthly premiums, deductibles and copays. In March GM retirees turned out at a U.S. District Court hearing in Detroit to ask that their health benefits remain unchanged.

The lead plaintiff in a suit challenging the deal, Leroy McKnight of Haslett, Mich., went to work for GM at age 19 and retired at age 56 in 2000. "It's an issue about corporate power versus individual contractual rights," McKnight says. "I sold 30 years of services to GM—for wages, health care while I was working, a pension, and health care while I was retired—and now they're trying to weasel out of their obligation."

Last year 12 percent of larger companies terminated all subsidized retiree health benefits for future retirees, the Kaiser/Hewitt study found. By all indications, the trend will at least continue and probably intensify. "The approaching generation of retirees is far less likely to have the level of financial security from employer-sponsored benefits that many of today's retirees enjoy," says Kaiser's Tricia Neuman, a co-author of the annual study.

Of retiree health benefits, prescription drug coverage is the most sought after. The Medicare Part D benefit was intended to ensure that such coverage would be available to all Medicare beneficiaries. But some analysts worry the new program makes it easier for employers to cancel drug benefits, which on average are more generous than Part D coverage, because employers can point to the federal program as a viable alternative.

As an enticement for companies to maintain their retiree drug benefits, Part D offers a subsidy that amounts to 28 percent of their overall costs on top of their existing tax break. Still, with Part D in place, 9 percent of larger companies plan to eliminate their retiree drug benefit in 2006, according to the 2005 Kaiser/Hewitt survey.

"Clearly some companies are feeling far more comfortable in cutting benefits," says Robert M. Hayes, president of the Medicare Rights Center, a national consumer group. "I have no doubt in the next couple of years employers will see this as a way of abandoning employees and retirees."

The outcome of a long-running legal battle could further clear the way for dumping retiree health benefits. Last September, ruling in a lawsuit brought by AARP, a federal judge in Philadelphia said that the Equal Employment Opportunity Commission could implement a rule that would allow employers to provide better benefits packages to younger retirees than to Medicare-eligible retirees without violating age discrimination laws.

The judge barred the EEOC from implementing the rule until AARP could appeal the decision. If the EEOC ultimately prevails, employers will be able to reduce or eliminate health benefits for retirees as soon as they become eligible for Medicare.

Another development echoes the tightening of accounting methods that started the rush to unload retiree health benefits in 1991. A new accounting requirement regarding underfunded retiree health benefits funds takes effect this year and will likely accelerate the trend, but analysts disagree on its effect.

All these factors will conspire to allow far fewer workers to retire with guaranteed medical benefits, and those lucky few are likely to find the benefits far less generous than their predecessors'. The United States, says Alicia Munnell, director of Boston College's Center for Retirement Research, is in the middle of a historic shift in how retirees are provided for. Except for the poorest families, this responsibility has centered on the employer.

"Now, the employer is pulling away from these commitments, and we have put nothing in place of the old system," she says. "The individual is just hanging out there, flapping in the breeze."

With no comprehensive solution in sight, workers and retirees will be fending for themselves.

Reed Karaim is a freelance writer in Tucson, Arizona.