Institutional Factors and the Future of Retiree Health Plans

Sylvester J. Schieber, Watson Wyatt Worldwide

April 2004 |

Traditionally, employers have served as the primary source of health insurance coverage for early retirees, as well as playing an important role in supplementing Medicare benefits for eligible retirees. But in recent years many employers have been cutting back their retiree health-benefit programs; some have eliminated them altogether. As we look to the future, there are strong indications that the trend away from employer-provided retiree health benefits will continue, leaving retirees and the government to divide up the increasingly expensive health care bill.

There are several factors behind employer cutbacks of retiree health benefits. For many employers, maintaining early levels of retiree health benefits has been more than they bargained for, given the combination of generous benefits, steadily increasing utilization rates, rapidly escalating costs of health services for retirees, growing retiree populations, and uncertain ability to sustain these programs. Employers still offering retiree health benefits today will face these same conditions and risks in the future, which will strongly influence the generosity of their programs and even whether they continue to offer them at all.

This paper will assess the extent to which universities are modifying their retiree health-benefit plans in response to the evolving trends. It will examine cost trends in health care in general and in retiree medical benefits in particular. The availability of health insurance for employees and retirees spurred greater demand for medical services and inflated their cost at a much faster rate than that of overall inflation. The combination of higher utilization and much higher costs was multiplicative in driving up the costs of all health insurance, but particularly retiree health benefits since older people generally use more health services than younger ones. Aging populations further raises the price tag for employers of providing retiree health benefits.

The paper will present findings from a survey that explicitly identifies universities' plans for sponsoring retiree health benefits in the future. This information will fill a void in the public understanding of exactly what has been happening to retiree health benefits. It will compare the benefits that are being provided to current retirees with those that are being offered to future retires. It will document how evolving strategies will affect future retirees. Declining employer support for retiree health insurance suggests that in the future, more retirees will have to pay their own way. But it appears that most younger employees are doing little to prepare for that eventuality. Many workers may have to delay retirement, which, given today's longer life expectancy and better health, may not be a bad outcome. However, all older people will not be able to continue working, and these retirees will be the most vulnerable to curtailments of retiree health benefits.

© 2014 and prior years, Teachers Insurance and Annuity Association - College Retirement Equities Fund (TIAA-CREF), New York, NY 10017