Commentary: Old, Ill, and Uninsured

Remember the 1990s image of retirement? Cash out at 55. Arizona. Golf. Nice pension. Good company-sponsored health insurance. The golden years.

Or not. Everyone knows that the market has ravaged Americans' 401(k) accounts. Less noticed, however, is what's happening to that other pillar of secure retirement: affordable health insurance. As medical inflation kicks in again, waves of employers are ditching or scaling back coverage for their retired workers. At this point, only about one-third of U.S. seniors enjoys any sort of job-based coverage, down from nearly 50% a decade ago.

Company plans are designed to wrap around Medicare, which doesn't pay for prescription drugs or catastrophic expenses such as long-term hospitalization. A quarter of seniors buy some of this missing coverage through Medigap policies, although even these supplemental plans rarely cover drugs. Another third of retirees, who have nothing but Medicare, are dangerously underinsured and often can't afford to buy the drugs or other care they need.

Now, as Corporate America cuts loose millions of additional retirees, this underinsured population is set to balloon dramatically. As retiring baby boomers lose their company coverage, they will have to buy their own medical insurance or live without it. Overall, they can expect to pay as much as $100,000 in health-care costs from the day they retire until they die, new studies show. "If you are 50 or younger today, you can look to a future where you are on your own" for retiree health care, says Maureen Cotter, a global practice director at consultants Watson Wyatt & Co.

The message is all too clear: Employees better start thinking seriously about socking away a lot more for retirement, because a growing share of health costs will fall on their shoulders. Washington has been mulling plans to spend $400 billion on prescription drugs for seniors. But even that would subsidize only about 20% of the cost, not nearly enough to replace company coverage. Of course, most Americans already save too little for old age, and it's a difficult time to put away even more in light of the battered job and stock markets. Still, if today's workers don't realize just how much they will be responsible for, many will wind up woefully underinsured.

Clearly, though, the employer-based retiree health care system is in tatters. A decade ago, 40% of large companies paid for seniors' health care. Today, that has plunged to just 23% (table). Overall, only government workers can expect to enjoy much coverage in coming years. In the private sector, everyone is now vulnerable, including unionized workers, who typically have the most protection.

Just look at the auto makers. General Motors Corp. (GM ) shells out $5 billion a year on health care, two-thirds of that for its 450,000 retirees. Already, GM has sharply cut retiree benefits for workers hired after 1992. In labor negotiations this summer, the United Auto Workers and the Big Three will battle over company efforts to slash those costs even more. AFL-CIO officials expect the issue to be critical in other labor talks around the country, too. Retirees "are the first place employers look for big savings," says Richard Banks, the federation's collective bargaining chief.

Even the companies that aren't abolishing coverage are shifting costs to retirees. In 1993, when new accounting rules required public companies to disclose their liabilities for future retiree health costs, many corporations capped annual payouts for former workers. About half have hit those caps, effectively forcing retirees to pay for rising expenses.

That's the case at Northeast Utilities System in Hartford, an energy company with 6,000 employees and 7,000 retirees. In 2002, its veteran workers who retired at 65 paid just $144 in annual medical costs. By 2006, they will shell out $1,698, the company says. Meanwhile, a quarter of large companies that still offer insurance may shift to plans that require retirees to pay the entire premium themselves, according to a recent survey by Hewitt Associates Inc. Others, such as IBM (IBM ), are moving from traditional health insurance plans to annual health-care accounts that workers can use to buy coverage when they retire.

Retirement will be even tougher for people who want to quit before they become eligible for Medicare at age 65. Northeast Utilities (NU ) estimates that someone who retires before 65 in 2006 will pay an average of $2,131 a year, a huge cost for most seniors. "It's a changing deal from what other generations expected," concedes Jean M. LaVecchia, NU vice-president for human resources.

Most Americans have no idea just how large their new health-care burden will be. A new study by the Employee Benefit Research Institute in Washington figures a 65-year-old who retires today and lives to age 85 can expect to pay on the order of $100,000 for health care. Those who retire a decade from now can count on paying at least twice that, including Medicare premiums, drugs, and all other out-of-pocket costs. Few retirees have anything close to that kind of cash. But unless medical inflation slows sharply, seniors will face a stark choice: either scale back their care or use precious dollars more wisely.

By Howard Gleckman

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