Human Capital & Careers

Most Companies to Trim Retiree Health Benefits

Less than 10 percent of companies say they won't chip away at medical benefits for current and future retirees.
Stephen TaubJune 29, 2006

A vast majority of employers are planning to curtail their retiree medical plans for current and future retirees in the next five years, according to a new study by Watson Wyatt Worldwide.

In a survey of 163 companies, the consulting firm found that only 5 percent of employers do not expect to place any additional restrictions on their medical benefits for future retirees over the next five years. Just 7 percent do not expect to restrict benefits for current retirees.

By contrast, 14 percent of employers plan to eliminate the benefit entirely for future post-65 retirees and 6 percent plan to eliminate it for their current post-65 retirees.

“One bit of good news for employees is that the vast majority of employers currently providing retiree medical benefits will continue to do so,” said Cara Jareb, director of retiree medical consulting at Watson Wyatt, in a press release. “The bad news is that retirees — especially future retirees — will have to pay more for their coverage.”

According to the survey, 65 percent of companies anticipate increasing the financial contributions for future retirees and half expect to change their plan design; virtually the same percentages plan to make such changes for current retirees.

In addition, nearly one-quarter (twenty-four percent) intend to tighten eligibility for future retirees and 10 percent expect to place a new or lower cap on their employer contributions.

Watson Wyatt found that many employers are currently relying on federal subsidies from the new Medicare Part D prescription drug program to offset the cost of their retiree medical plans. Of the 77 percent of employers that took the federal subsidy in 2006, 64 percent plan to take it in the future.

“Employers are biding time with the federal subsidy for now as they sort out their long-term retiree medical strategies,” Jareb said. “But many of them will likely find that relying on the subsidy will not be the most effective solution to control costs going forward. At that point, employers will need to explore other ways to fund and deliver these benefits.”

Employers Plan Further Restrictions to Retiree
Medical Benefits
Percent of Employers Planning Action Over Next Five Years
Planned Initiatives Current Retirees Future Retirees
No further restriction of offerings 7% 5%
Eliminate benefit for post-65 retirees 6% 14%
Change plan design for post-65 retirees 49% 50%
Increase employee contributions 64% 65%
Tighten eligiblity 8% 24%
Add cap or lower existing cap 8% 10%
Add account-based options 10% 26%
Source: Watson Wyatt Worldwide