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Retirees face pinch on benefits

Costs surging; many firms halt programs

Companies are drastically increasing what their retired employees pay for healthcare benefits, and many are eliminating them altogether, according to a comprehensive study on employer provisions for retiree health coverage.

The reduction in benefits in the past year alone has been huge. People who retired in 2003 pay 18 percent to 20 percent more for health coverage than did those who retired in 2002, according to a survey released yesterday by the Henry J. Kaiser Family Foundation and Hewitt Associates.

For baby boomers approaching retirement, the outlook is more troubling. Ten percent of employers surveyed eliminated health plans last year for workers who will retire in the future, Kaiser said. The trend is expected to accelerate and will be devastating, particularly for people who accept early retirement packages and cannot afford to buy coverage on the open market or may be unable to obtain it at all.

Pensions are protected by federal law, but employers are under no legal obligation to provide retiree health benefits or to continue existing plans.

"We have seen employers moving very aggressively to get out of the retiree healthcare business," said Ben Haas, a healthcare consultant in the Boston office of Watson Wyatt Worldwide.

Haas estimated that someone who retires at age 55 would spend $400,000 over a remaining lifetime for healthcare if he or she picks up the entire tab. "People approaching retirement, even if they've done some good financial planning, don't understand the magnitude of the exposure in healthcare," he said.

Retirees are "easy targets" for cuts, said E. David Logan, one of dozens of Commonwealth Electric employees whose health benefits were trimmed after NStar acquired the utility in 1999. Retirees have "left your company and dispersed, and it's very difficult for them to come together and take a concerted action," said the former executive. Logan, 55, said he pays about $1,000 more a year just for the chiropractor whom his wife, Helen, visits to control her acute pain from multiple sclerosis. The issue goes beyond financial concerns, he said, and "undermines that unwritten credibility that has always existed between employees and companies. It's not a good way for the country to go."

The Kaiser survey of companies with 1,000 or more employees shows that the majority of the 408 employers plan to shift more of their healthcare costs to their retirees in the next three years. Cost shifting will continue as more companies hit preset caps on what they will spend for the benefits.

Elimination of such plans is also rising, according to another Kaiser survey, which found 38 percent of employers offered retiree healthcare last year, down from 66 percent in 1988.

Kaiser vice president Tricia Neuman, coauthor of the new Kaiser-Hewitt study, said the data portray a bleaker retirement for everyone, but more so for those who have yet to retire. "Current retirees appear to be shielded from terminations but can expect rising premiums and cost sharing," she said. On the other hand, "current workers or future retirees are far less likely than their parents' generation to get retiree health benefits."

In the 1970s, retiree health plans proliferated among companies as a low-cost way to help union and nonunion workers. In the early 1990s, employers began to curb them, or imposed caps, when accounting rule changes required they report the benefits as liabilities on their books. Employers scaled back further as their growing retiree populations drove up their costs. The trend has accelerated in recent years as annual health costs have soared at double-digit rates.

The programs are prized by retirees who get access to affordable, quality healthcare until they reach age 65 and qualify for Medicare. After retirees turn 65, these plans cover part or all of what Medicare does not.

Kaiser's survey said retirees under 65 pay just $166 of employers' average $427 monthly cost; those over 65 pay $83 of employers' $212 cost.

But individual retirees can pay far more: At more than 40 percent of employers surveyed, retirees pay between 41 percent and 100 percent of the company's total premium.

"The benefits tend to be generous and the premiums tend to be more affordable than what's out there in the open market," said Neuman. But, for people over 65 living on a fixed income, she said, "these premiums really do matter."

Elimination of retiree health plans is a tactic increasingly used by companies in US Bankruptcy Court. United Airline's parent company, UAL Corp., yesterday said it would ask its 35,000 US retirees to carry more of the cost for their medical care, and Kaiser Aluminum Corp. this week asked a judge for permission to end the benefits, which cost $60 million a year for its 4,000 salaried and 7,000 hourly retirees.

Kaiser chief executive Jack Hockema said in the court filing, "Our business plan shows that the restructured Kaiser Aluminum will be unable to fund pension and other postretirement benefits as they are presently offered."

In a down economy, drastic measures are not confined to troubled companies. Laurie Martinelli, the executive director of Health Law Advocates in Boston, said that is because retiree healthcare, unlike pensions, is not protected by the federal Employee Retirement Income Security Act. Employers are under no legal obligation to continue existing plans, "which means the employer giveth, and the employer can taketh away."

Critics of the new Medicare prescription drug plan said it may encourage some employers to drop their retirees' health plans. Starting in 2006, the new federal drug plan will subsidize employers that offer drug coverage as part of their retiree health benefit. If the employer does not offer it, drugs, which represent a big share of the elderly's healthcare expenses, will be covered by Medicare.

The danger is that if retirees can now obtain drug coverage from the government, employers will say, "we think it'll be less expensive for you to get it someplace else," said Kenneth Thorpe, a healthcare economist at Emory University in Atlanta. In 20 years, he predicted employer healthcare for retirees will "be a boutique industry."

Massachusetts Senator Edward M. Kennedy yesterday said the system of employer-sponsored health plans is already "in jeopardy" and will be further undermined by the Medicare drug plan. "It is urgent that Congress act to fix this ill-considered program," he said.

Kimberly Blanton can be reached at blanton@globe.com.

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