Erie County Decision Could Cost Retirees Their Health Insurance; Extending Benefits Could Up Firm Liabilities by $114 Billion

WASHINGTON, May 19 -- Millions of retirees currently provided health benefits by their former employer could be at risk, if legislation to address the recent Erie County court decision is not implemented, according to a new report from the Employment Policy Foundation (EPF), a Washington, D.C.-based research group. EPF calculated that the decision could increase employer retiree health liabilities-already over $650 billion-by another $114 billion without legislative action to fix the problem.

Currently, most employers spend more for their younger retirees to provide “bridge” benefits. Once a retiree reaches age 65, the employer provides health coverage to supplement Medicare. The court ruled that these unequal benefits unfairly discriminated against retirees who were old enough to qualify for the government-run health program.

After the initial decision in the case, the Equal Employment Opportunity Commission (EEOC) issued rules clarifying that the Age Discrimination in Employment Act did not prohibit employers who offer retiree health benefits from providing enhanced bridge benefits to non-Medicare-eligible retirees. In March, a U.S. District Court in Philadelphia blocked the rule from going into effect.

The decision would force employers to choose one of two options: 1) spend an average of $1,500 more for each of the 8 million Medicare-eligible retirees or 2) cut spending on benefits for those retirees under age 65. Given that firms already face retiree health liabilities over of $650 billion, it is doubtful that they would be able to choose the first option in order to comply with the Erie County decision.

Current accounting rules require firms to account for both current and future retiree health liabilities on their balance sheet making the total balance sheet impact of increasing spending for Medicare-eligible retirees $79 billion to $114 billion. The lower estimate reflects the assumption that employers will cap future premium contributions for both pre- and post-65 retirees, which nearly 50 percent of employers have already done.

“The high cost of equalizing benefits may cause some firms to eliminate retiree health coverage for future retirees, which will substantially increase their future out-of-pocket costs,” said Janemarie Mulvey, the Foundation’s president and chief economist.

According to EPF, eliminating coverage for future retirees would increase the out-of-pocket health costs of a 45-year old worker retiring at age 65 by $150,000. To cover these costs a worker would have to invest $55,000 today in order to have sufficient funds to pay those future costs.

“This is a significant issue with a potentially devastating impact for the 11 million retirees and dependants who currently have retiree health coverage from a private-sector employer,” said Mulvey.

EPF’s report is available online at: http://www.epf.org/pubs/newsletters/2005/ib20050519.pdf

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Mike Chittenden

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Employment Policy Foundation

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