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A series of federal business accounting changes, most notably the passage of the Financial Accounting Standards Board’s Financial Accounting Statement No. 106 (FAS 106) in 1990, will lead to a steady decline in retirees’ work-based health benefits, according to the Washington, DC-based Employee Benefit Research Institute (EBRI).
"In a nutshell, FAS 106 changes the accounting rules for employers providing retirement benefits by making the liability of future expenses associated with that more explicit, and that has had a huge impact on their balance sheets. It didn’t change the actual cost, but the way that cost was accounted for," explains EBRI’s Paul Fronstin. He details these trends in EBRI’s August 2001 Issue Briefs, in a report titled, "Retiree Health Benefits: Trends and Outlook."
The report notes that the downward trend in retiree health benefits is not that apparent to current retirees because the courts have ruled that an employer has the right to terminate or amend retiree health benefits if it has proved that such a right has been reserved or stated in specific language and on a widely known basis. Partly as a result, retiree health benefits are being restricted in many cases by making it harder for workers to qualify for them.
"My best guess on when the impact will begin to be felt is another five or 10 years," says Fronstin.
What the report makes clear is that as a result of FAS 106 and the rising cost of providing retiree health benefits in general, employers began a major overhaul of their retiree health benefits. Some employers put caps on what they were willing to spend on retiree benefits. Some added age and service requirements, while others moved to some type of "defined contribution" health benefit. Some completely dropped benefits for current retirees, although this has happened less frequently.
Fronstin expects employees to make adjustments in their behavior as a result of these changes. "You may see people working longer when they find out they won’t be able to retire with health benefits — at least not before they are 65, when they can get Medicare," he notes.
It’s impossible to know how many employees will end up without insurance when they retire, says Fronstin. "We’d have to make predictions about how often they change jobs," he notes. In larger companies (those with more than 500 employees), somewhere between 30% and 70% of employers currently offer retiree health insurance, according to Fronstin. "If you include all the companies with fewer than 500 employees, that number drops to about 9%," he says.
In light of these current trends, Fronstin observes, employees will have to start thinking differently about the future in terms of their finances. "They have to figure out what they will need; how much it will cost them to live including [supplemental] insurance, and base their planning on that," he advises.
[For more information, contact: Paul Fronstin, Employee Benefit Research Institute, Suite 600, 2121 K St., N.W., Washington, DC 20037-1896. Telephone: (202)775-6352. E-mail: firstname.lastname@example.org.]