Train Wreck Coming: Companies Can Cut Retiree Health Benefits at Age 65

Ooof, talk about dispelling the illusion that anyone will take care of the aged. There has been ample comment about the need to reform Social Security. However, the real problem on the retirement entitlements front is Meidcare. Paul Krugman and Dean Baker, among others, have pointed out at length that alarming increases forecast for Medicare costs result mainly, not from an aging population, but from rising medical costs. Unfortunately, the sort of root and branch changes they recommend to rein in America’s unnecessarily expensive system are unlikely to be put into practice anytime soon.

In the meantime, corporations have gotten yet another sop from the Bush Administration. It isn’t sufficient that the latest expansion showed the smallest proportion of GDP growth going to workers of any postwar expansion, by a considerable margin, while also exhibiting the largest share of GDP increase going to corporate profits (again by a large margin). No, they get another bennie to help their bottom line at employees’ expense.

The latest policy is a regulatory change by the Equal Employment Opportunity Commission that says employers can reduce benefits when retirees reach age 65 and become eligible for Social Security and Medicare.

Another instance of the Bush Administration, while having come into office claiming to be a compassionate conservative and anti-large-scale government, being anything but that. This allows corporations to shift their obligations on to taxpayers, and will make it politically more difficult to implement changes in Medicare and Social Security.

The perverse element is that this move may also in the medium term make more aggressive health care reform more likely.

From the New York Times:

The Equal Employment Opportunity Commission said Wednesday that employers could reduce or eliminate health benefits for retirees when they turn 65 and become eligible for Medicare.

The policy, set forth in a new regulation, allows employers to establish two classes of retirees, with more comprehensive benefits for those under 65 and more limited benefits — or none at all — for those older.

More than 10 million retirees rely on employer-sponsored health plans as a primary source of coverage or as a supplement to Medicare, and Naomi C. Earp, the commission’s chairwoman, said, “This rule will help employers continue to voluntarily provide and maintain these critically important health benefits.”

Premiums for employer-sponsored health insurance rose an average of 6.1 percent this year and have increased 78 percent since 2001, according to surveys by the Kaiser Family Foundation. Because of the rising cost of health care and the increased life expectancy of workers, the commission said, many employers refuse to provide retiree health benefits or even to negotiate on the issue.

In general, the commission observed, employers are not required by federal law to provide health benefits to either active or retired workers.

Dianna B. Johnston, a lawyer for the commission, said many employers and labor unions had told it that “if they had to provide identical benefits for retirees under 65 and over 65, they would just drop retiree health benefits altogether for both groups.”

In a preamble to the new regulation, published Wednesday in the Federal Register, the commission said, “The final rule is not intended to encourage employers to eliminate any retiree health benefits they may currently provide.”

But AARP and other advocates for older Americans attacked the rule. “This rule gives employers free rein to use age as a basis for reducing or eliminating health care benefits for retirees 65 and older,” said Christopher G. Mackaronis, a lawyer for AARP, which represents millions of people age 50 or above and which had sought in court to forestall the regulation’s adoption in final form. “Ten million people could be affected — adversely affected — by the rule.”

The new policy creates an explicit exemption from age-discrimination laws for employers that scale back benefits of retirees 65 and over. Mr. Mackaronis asserted that the exemption was “in direct conflict” with the Age Discrimination in Employment Act of 1967.

The commission, by contrast, said that under that law, it could establish “such reasonable exemptions” as it might find “necessary and proper in the public interest.” The United States Court of Appeals for the Third Circuit, in Philadelphia, upheld this claim in June, in the case filed by AARP, which has asked the Supreme Court to review the decision.

In its ruling, the appeals court said, “We recognize with some dismay that the proposed exemption may allow employers to reduce health benefits to retirees over the age of 65 while maintaining greater benefits for younger retirees.” But the court said the commission had shown that the exemption was “a reasonable, necessary and proper exercise” of its authority.

Under the new rule, employers may, if they choose, provide retiree health benefits “only to those retirees who are not yet eligible for Medicare.” Likewise, the rule says, retiree health benefits can be “altered, reduced or eliminated” when a retiree becomes eligible for Medicare.

Further, employers will be able to reduce or eliminate health benefits provided to the spouse or dependents of a retired worker 65 or over, regardless of whether benefits for the retiree are changed.

Employers and some unions contend that retirees under 65 have a greater need for employer-sponsored health benefits because they are generally not Medicare-eligible. Large employers have often provided some health benefits to retirees 65 and older, to help cover costs not paid by Medicare. But employers have for years been trying to reduce retiree benefits or to shift more of the cost to retirees.

Lawyers for the commission said the new Medicare drug benefit, now nearing the end of its second year, had strengthened the case for the regulation because it guaranteed that retirees 65 and older would have access to drug coverage. Younger retirees have no such guarantee, so employers may want to provide drug coverage to them in particular, the lawyers said.

Helen Darling, president of the National Business Group on Health, which represents large employers, welcomed the rule.

“If employers could not coordinate with Medicare, they would be far less likely to provide health coverage” to retirees, Ms. Darling said. “They could not afford to.”

A study by the Government Accountability Office in 2001 estimated that one-third of large employers and fewer than one-tenth of small employers offered health benefits to retirees. Ms. Darling said newer retirees often received not comprehensive coverage but instead a fixed amount of money, based on years of service, to help them with their medical costs.

James A. Klein, president of the American Benefits Council, a lobby for large employers, said: “The new rule is a victory for common sense and for retirees. Retiree health coverage has been declining for many years. Without this rule, many more retirees, especially early retirees, could find themselves without employer-sponsored coverage.”

Gerald M. Shea, assistant to the president of the A.F.L.-C.I.O., also saw merit in the new rule.

“Given the enormous cost pressures on employer-sponsored health benefits,” Mr. Shea said, “we support the flexibility reflected in the rule as a way to maximize our ability to maintain comprehensive coverage for active and retired workers.”

Schoolteachers, like many other public employees, often retire early and rely on employer-provided health benefits until they become eligible for Medicare. At a Congressional hearing in 2005, the National Education Association and Representative John A. Boehner of Ohio, who is now the House Republican leader, supported the proposed rule. The teachers union said it feared that employers would cut health benefits for early retirees if they had to provide identical benefits to those over 65 and those under.

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  1. Independent Accountant

    The Bush Administration is very compassionate, to illegal aliens and big business interests.

  2. doc

    AARP voted for The Pension Reform Act, which ended up being about 1000 pages of chaos written by The Securities Industry (lawyers), thus anything AARP is involved in, probably lacks due diligence, which in many ways, is understandable, as these old timers can only do so much! Nice report though, thanks!!

    Im on to other things (now), like inflation from oil: Fact: The subterranean battle among Kurds, Turkmen and Arabs for control of the oil-rich Kirkuk province makes the Iraqi north a political mine field. Kurdistan now also hosts the Kurdish Workers Party (PKK) guerrillas that sneak over the border and kill Turkish troops. The north is so unstable that the Iraqi north is now undergoing regular bombing raids from Turkey.

  3. doc

    Oops, AARP doesnt vote….they supported The Pension Reform Act, as did most people (that could vote), due in large part to “lower fees” for pensions, which ironically are linked to yield and credit enhancements that potentially come from the liquidity provided by hedge funds and investments in derivatives like CDOs and other complex and non-traditional pension fund holdings, i.e, all these fine people traded slightly higher pension fund costs for increased risk and volatility and conditions that cause people to worry about safe futures. Volatility is obviously something that hedge funds profit from, versus those old slow moving 30 year bonds that help people sleep; thank the folks on wallstreet for linking up with the whitehouse!

    Sorry to rant, but, its another big issue connected to that train wreck!

  4. Yves Smith


    Thanks for the info re Kurdish Iraq. I haven’t looked into that one, but the incursion of Turkish troops into Iraq some weeks ago was a sign that they had concluded the province was ripe for picking.

  5. Anonymous

    Its probably a good thing.
    It is another step in the disentanglement of employment and health care, and will probably help to gin up support for a single payer gov’t system

  6. Anonymous

    I fail to see why anyone should be surprised by this. I’ve understood since joining the military at age 18 that we are all just human tools. Tools to be used up, broken, and thrown on the pile of other broken tools once our usefulness is gone.

    No surprise here. Save $ early and often, cuz nobody else will look after you. They don’t care if you wind up on a park bench.

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