Employment-Based Retiree Health Benefits: Trends in Access and Coverage, 1997-2010

Abstract

This paper uses recently released data from the U.S. Census Bureau to examine recent trends in offer rates for retiree health benefits, as well as changes to eligibility for coverage and changes to benefits packages. It also examines how the populations of retirees with retiree health coverage and workers expecting such coverage have changed between 1997 and 2010. The paper ends with a discussion of what might be next for retiree health benefits. Key findings include the following:

Very few private-sector employers currently offer retiree health benefits, and the number offering them has been declining. In 2010, 17.7 percent of workers were employed at establishments that offered health coverage to early retirees, down from 28.9 percent in 1997.

Between 1997 and 2010, the percentage of non-working retirees over age 65 with retiree health benefits fell from 20 percent to 16 percent.

Because employers are under no obligation to provide retiree health benefits, except to current retirees who can prove that they were promised a specific benefit, and because (unlike defined benefit pension plans) employers are not under any obligation to pre-fund retiree health benefits, it is likely that employers will continue to make changes to those programs, especially for future retirees.

Earlier research found little impact of reductions in coverage on retirees, but that may be because initial changes employers made to retiree health benefits affected future retirees as opposed to then-current retirees. Over time, more and more retirees have “aged into” those program changes, resulting in the greater impact found in more recent studies.

While many employers have dropped retiree health benefits, especially for future retirees, most that have continued to offer retiree health benefits have made changes in the benefit package they offer: raising premiums that retirees are required to pay, tightening eligibility, limiting or reducing benefits, or some combination of these.

Increasing retiree contributions tops the list of likely future changes: 43 percent of employers say they are very likely to increase the retirees’ portion of premiums next year, and another 35 percent are somewhat likely to do so.

Despite the fact that workers are more likely to expect retiree health benefits than retirees are actually likely to have those benefits, the expectations gap is closing: By 2010, 32 percent of workers expected retiree health benefits, while only 25 percent of early retirees and 16 percent of Medicare-eligible retirees had them.

Public policymakers face the difficult task of trying to provide solutions for a system that is largely voluntary. As employers view state-based health exchanges as a viable option to retiree health benefits, they may view their own role in providing health coverage to retirees as no longer necessary.

Keywords: Employment-based benefits, Health benefit design, Health insurance attitudes and opinions, Medicare, Postretirement benefits, Private-sector establishments, Retiree health benefits, State and local government employers

JEL Classification: I1, I18, J14, J32