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Employer-sponsored health insurance for retirees: the need and cost.

Employer-sponsored health insurance for retirees: the need and the cost

Retirees in the private sector are finding employer-sponsored health insurance an increasingly important benefit, according to a recent report by the U.S. Department of Labor's Pension and Welfare Benefits Administration. Some highlights:

Although medicare is the principal source of health coverage for the elderly, private health insurance, especially coverage provided through employer-sponsored group plans, provides an important supplement. The significance of private health benefits is likely to continue to grow as early retirement becomes even more common, life expectancy increases, and the older population grows.

Coverage. In 1983, an estimated 4.6 million retirees and 2.3 million dependents were covered by private sector employers' health insurance programs. Among retirees and dependents age 65 and over, 4.3 million persons were covered, or 16 percent of this segment of the population.

Group health insurance is a key consideration to those contemplating early retirement because medicare is not available before age 65. An estimated 1.6 million retirees and 1 million dependents under 65 were covered by employer-sponsored programs.

Employer-sponsored group insurance generally provides better coverage for health services than other private health insurance programs. Although cost-sharing does vary widely between firms, employers pay an average of 58 percent of the premiums under group insurance plans.

No systematic sample data are available on the criteria used by employers to determine eligibility for retiree health benefits. However, scattered data indicate that, to be eligible for benefits, employees usually have had to work for a firm for at least 10 years, and in some cases for as many as 20 years.

Funding. Prefunding of retiree health benefits is rare. Almost all firms finance these benefits on a pay-as-you-go basis.

The Deficit Reduction Act of 1984 virtually precludes prefunding for retiree medical benefits. (A concern of the Congress was potential tax abuse.) An alternative would be prefunding as an incidental benefit to a pension plan under section 401(h) of the Internal Revenue Code. Retirees' benefits funded under this section, however, are not afforded the same level of protection as pension benefits.

The present value of the accrued liability for retiree health benefits is estimated to have been $98.1 billion in 1983. This accrued liability represents the present value of benefits that both active and retired employees had "earned' as of the end of 1983.

If employers had been prefunding retiree health insurance, the 1985 annual accrual for new benefit liabilities would have been an estimated $750 million.

Medicare tax rates are currently inadequate to sustain the program through the 1990's, and concerns about the Federal deficit suggest that medicare benefits are unlikely to increase in the near future. The continuing rise in health care costs over the past decade has resulted in many companies reducing their health care benefits or increasing costs to beneficiaries, including retirees.

The report, "Employer-Sponsored Retiree Health Insurance,' was prepared by the Office of Policy and Research, Pension and Welfare Benefits Administration. Copies may be obtained by writing to the Department of Labor, Office of Policy and Research, Pension and Welfare Benefits Administration, Washington, DC 20210 or by calling 202-523-9505.
COPYRIGHT 1987 U.S. Bureau of Labor Statistics
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1987 Gale, Cengage Learning. All rights reserved.

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Title Annotation:research summary
Publication:Monthly Labor Review
Date:May 1, 1987
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