The Impact of the Erosion of Retiree Health Benefits on Workers and Retirees

March 2005
EBRI Issue Brief #279
Paperback, 20 pp.
PDF, 570 kb
Employee Benefit Research Institute, 2005

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Executive Summary

• The percentage of private-sector employers offering health benefits to retirees has been declining in the United States for many years. In 2002, 13 percent of private-sector employers offered retiree health benefits to early retirees (pre-65), down from 22 percent in 1997. Similarly, in 2002, 13 percent of private-sector employers offered retiree health benefits to Medicare-eligible retirees (age 65 or older), down from 20 percent in 1997.

• Reasons for the Decline: The Financial Accounting Standards Board triggered most of the changes that private-sector employers have made to retiree health benefits when in 1990 it approved Financial Accounting Statement No. 106 (FAS 106). FAS 106 requires companies to record retiree health benefit liabilities on their financial statements in accordance with generally accepted accounting principles. With the new view of the cost, and the increasing cost of providing retiree health benefits in general, many private-sector employers began to overhaul their retiree health benefit programs in ways that controlled, reduced, or eliminated their costs. Today, the public sector faces similar accounting standards and similar cost pressures.

• State and Local Governments: The percentage of local governments offering retiree health benefits has declined, while the percentage of state governments offering it has increased.

• Workers: Workers today are less likely to expect to receive retiree health benefits in retirement than they were in the past. In 2002, 47 percent of workers ages 45–64 reported that they expect to receive retiree health benefits in retirement, down from 50 percent in 1997.

• Retirees: Both early retirees and Medicare-eligible retirees have experienced a decline in coverage for retiree health benefits. Between 1997 and 2002, the percentage of early retirees with retiree health benefits declined from 39.2 percent to 28.7 percent. Similarly, the percentage of Medicare-eligible retirees with retiree health benefits declined from 28.1 percent to 25.5 percent.

• Implications: Despite the fact that workers are more likely to expect retiree health benefits than retirees are actually likely to have those benefits, changes that employers have made to retiree health benefits will likely have a greater impact on today’s workers—which is to say future retirees. The changes that employers have made may not have a noticeable effect on trends in insurance coverage until a few years after the baby boom generation starts to retire and significant numbers of retirees discover the limits on or the costs of whatever retiree coverage they might have. Retirement behavior patterns may also change as employees nearing retirement age postpone their decision to retire upon learning that, without a job, they may not be able to obtain health insurance coverage, or they are unable to afford insurance premiums and/or out-of-pocket expenses. Public policymakers face the difficult task of trying to address these issues.