Association of
Ameritech/SBC Retirees
Item Of Interest Posted 10/96/05
SHRINKING BENEFITS By Ellen E. Schultz Staff Reporter; Wall Street Journal;
10/19/05, Pg D1
October 19, 2005
SHRINKING BENEFITS
Companies that have recently cut retiree health benefits -- or are
considering it:
• Delta
• Northwest
• Sears
• General Motors
• Lucent
• Visteon
• US Airways
How Safe Are Your Retiree Health Benefits?
As GM Wins Deep Concessions, Worries Grow for Many Workers;
Ways to Tell if Cuts Are Likely
By ELLEN E. SCHULTZ
Staff Reporter of THE WALL STREET JOURNAL
October 19, 2005; Page D1
General Motors Corp.'s announcement that it will reduce health-care
coverage for its union retirees has retirees and employees all over
the country wondering if their own benefits are next.
After all, GM is only the latest in a long list of employers that
have announced this year that they will reduce or eliminate retiree
coverage, including Sears Holdings Corp. and Visteon Corp. Northwest
Airlines Corp. has said in court papers that it intends to cut
retiree health benefits. And to save money, other companies may be
tempted to follow along.
As the health-care landscape shifts, some new -- and worrisome --
trends are becoming clear: Retiree health coverage may not be
extinct yet -- about two-thirds of large employers still provide
health coverage to eligible retirees, as do most public employers.
But it is evolving in ways that increase costs for retirees and
create unexpected groups of winners and losers.
For instance, the retirees most vulnerable to cutbacks are not union
retirees -- like those affected by the GM move -- but former
salaried employees. And even if your retiree health coverage doesn't
disappear, there is a growing danger the costs will rise so high
that you can't afford to pay the premiums. What's more, the new
Medicare prescription-drug coverage, which was supposed to ease the
burden, is not likely to lower costs for most workers.
Here are answers to some of the questions on people's minds:
How safe are my benefits?
It depends on what kind of retiree you are.
The most vulnerable are former salaried employees. The courts have
generally allowed employers to reduce or eliminate the benefits for
nonunion retirees, even years after they've retired, and even if
they were promised the benefits in writing.
General Motors, for example, once promised lifetime health coverage
to nonunion retirees, often to encourage them to retire early. But
then the company began cutting the benefits of 85,000 salaried
retirees, and they sued. In 1998, the Sixth Circuit appeals court
ruled that even though GM advised prospective retirees that health
coverage would be provided "at GM's expense for your lifetime," a
clause in the technical plan summary noted that GM reserved the
right to alter the benefits. After that key decision, salaried
retirees, including those at Unisys Corp., have steadily lost their
cases.
Bottom line: If you're a salaried retiree, or will be one, your
employer can cut your benefits, even if promised in writing, as long
as the plan has "reservation of rights" language in it.
What if I'm covered by a union contract?
You're safer if you're a union retiree: The courts generally haven't
allowed employers to unilaterally cut benefits that are part of a
negotiated contract. Still, in recent years, some employers have
been arguing in court that the contracts were ambiguous --
specifically, that "lifetime" referred to the life of the contract,
not the lifetime of the retiree. While the courts have returned
mixed decisions, union retirees are still safer from cuts.
And even a union can seek benefits cuts for retirees in special
circumstances. This week, worried that GM might unilaterally cut
retiree health benefits, the United Auto Workers asked a court to
allow it to voluntarily agree to allow GM to cut the retiree
benefits. Normally, a union can't negotiate to reduce the benefits
for people who are already retired. But retired auto workers are
concerned that if GM were to become insolvent, their benefits would
disappear altogether.
What if my employer goes bankrupt?
You lose. While the Pension Benefit Guaranty Corp., a quasi-private
insurer, will continue to pay pension benefits, retirees usually
lose their health coverage. Companies that have asked bankruptcy
courts for permission to eliminate retiree benefits include Kaiser
Aluminum & Steel Corp. and Bethlehem Steel.
I'm still working. Will I have coverage when I retire?
Again, if you're a salaried employee of a private company, your
employer could probably cut your benefits. Meanwhile, if you change
jobs, you'll be unlikely to qualify for coverage: Employers have
been increasing the number of years you must work to be eligible, to
15 years from 10, for example. And many, including Lockheed Martin
Corp., have eliminated coverage for new hires.
Some employers, like International Business Machines Corp., have
adopted savings accounts that enable employees to set aside pretax
dollars to fund their share of retiree health benefits. But in these
arrangements, once you retire, you generally have to buy the
coverage from your employer, and accept what it charges, which may
not be any cheaper than what you'd pay on the open market. Your
savings may cover only a few years of benefits.
These types of retiree savings accounts are likely to become more
common. Employers benefit, because they can contribute company stock
to the funds, instead of cash or other securities. Meanwhile, the
assets in the funds, which operate like mini-pension plans, can
generate income that offsets costs.
GM has announced it will set up a type of savings program to enable
union workers to set aside money to use later, and the auto maker
says it will contribute $3 billion to the program over the next five
years.
My premiums have quadrupled. Why?
There are several likely reasons. At least half of employers,
including General Electric Co., Halliburton Inc. and IBM, have
established ceilings on what they will pay for retirees' coverage.
Once this cap is reached, all the extra costs may be passed on to
the retirees. Thanks to these caps, employers are largely protected
from rising health-care costs -- but retirees aren't.
Meanwhile, many employers have begun to segregate retirees into
their own risk group, rather than include them in a larger group
that includes active workers. When retirees are segregated into
their own pool, the per-capita costs rise, because an older, sicker
population may need more medical care.
As costs rise, healthy people drop out to get cheaper coverage
elsewhere. But sicker retirees, and those with pre-existing
conditions that make them uninsurable, remain in the health plan,
driving up costs. When Xerox Corp. split the retirees into a
separate risk pool in 2003, the move caused retirees' costs to
nearly double.
Employers benefit when retirees drop coverage. Not only do they save
cash, but they can reverse a liability they have recorded for all
the estimated future payments. Under accounting rules, this
generates gains that indirectly boost income.
My employer hasn't cut coverage. Am I just lucky?
Yes -- but don't hold your breath. One reason that an employer may
not be raising your premiums is that within the past five years it
has used surplus pension assets to pay retiree health costs. This is
legal, but the tradeoff is that employers who do this aren't allowed
to cut benefits by more than 20% over the subsequent five years.
Another reason employers have continued to provide retiree medical
coverage is because it's a useful tool to get older workers to
leave. A 58-year-old may be reluctant to retire, even with a good
pension, if he faces the prospect of buying individual health
coverage in the open market. The benefits thus help employers reduce
their work force without raising the company's health-care costs;
although the person is now classified as a retiree, the actual cost
of the coverage hasn't changed.
Will the new Medicare prescription-drug coverage lower the cost of
retiree health benefits?
Not for you. Some employers have decided to drop the prescription
drug benefit they provided to retirees who qualify for Medicare.
(See related coverage.1)
Others will continue to provide the coverage, in exchange for
billions of dollars in government subsidies. But your costs may
still rise.
Here's why: Starting in 2006, the U.S. will reimburse employers for
28% of the cost of retiree prescription-drug spending over $250, up
to $1,330 per retiree per year, tax-free.
The subsidy was supposed to encourage employers to continue offering
retiree health coverage. But employers can collect the subsidy and
continue to cut benefits. The rules, which were crafted with
significant input from employer groups, allow employers to count
retiree contributions towards the total that qualifies for the
subsidy, and lets employers aggregate all their retiree groups.
As a result, an employer can completely eliminate the benefits for
some groups, and still collect millions of dollars in government
money, according to the federal Centers for Medicare and Medicaid
Services. Thanks to the subsidy, GM cut $4.1 billion in retiree
liabilities from its books, which represents the amount it
anticipates collecting from the government over time.