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Retirees Finding Cost of Health Benefits Soaring

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Tens of thousands of retired workers, long accustomed to generous health benefits, are being hit with huge hikes in premiums as rising medical care costs strain tight corporate budgets in a lackluster economy.

The costs for providing benefits to retirees are rising even faster than premiums for active workers, pushing more companies to eliminate retirement health benefits in the future. Currently, more than 12 million retirees have some kind of medical coverage, provided by roughly half of U.S. companies with 1,000 or more employees.

Retiree premiums are doubling for some, or at least jumping much faster than the 13 to 25 percent rate increase for active workers because companies are exhausting caps set years ago to protect themselves from rising health care costs, analysts say.

Harmon Davis of Bourbonnais, Ill., knows all about it.

Davis, 60, repaired cash registers and business machines for NCR Corp. for 40 years before retiring three years ago under a deal that put his monthly premiums for he and his wife at $100 this year. But by next year, his premiums will more than double to $231, according to a letter Davis received from NCR in October.

And by 2005, Davis' costs are projected to triple to $620 a month - an amount that will eat more than a third of his annual $21,540 pension. Davis expects he will be forced to look for a part-time job pay the bills.

"A number of us had based our early retirement decision somewhat on the fact that we would have medical coverage at a reasonable rate," Davis said. "Had I known this is coming, there are more chances that I would have stayed than would have left."

The trend of cutting benefits for retirees comes just as Congress passed a drug benefit for seniors under Medicare - one of the most important benefits for retirees with employer-based medical coverage, seniors say.

Yet the Medicare drug plan does little for retirees under 65. Even for those over 65, Medicare's drug benefit will be enacted too late to help them with their premium hikes because Medicare's proposed prescription coverage would largely take effect in 2006, with the exception of drug discount cards available next year.

The spike in costs for employers come as companies wrestle with myriad economic conditions and demands by Wall Street to improve bottom lines. Some companies are also exhausting budgets for retiree medical benefits.

Dayton, Ohio-based NCR wrote letters to its more than 14,000 retirees in October letting them know the company needs to eliminate $250 million in expenses from throughout the company by the end of 2005 and needs to cut medical benefits to meet the company's overall budgeting targets.

NCR said it is passing along more medical costs to retirees over a two-year period to try to blunt the impact. It isn't the first time NCR has cut retiree benefits.

In 1999, NCR eliminated supplemental medical coverage to Medicare for those who were not 64 as of Dec. 31, 1998. In 1999, NCR also stopped offering active employees retiree benefits. For those retirees who had not reached 65, 1999 was also the first time they began contributing to their premiums, according to NCR spokesman John Hourigan.

"The objective is to better align our capital, both human and financial, in order to ensure NCR is a successful and sustainable company for decades to come," NCR Chief Executive Mark Hurd wrote to retirees. "Many of the decisions we are making are not easy because often people are affected in some way."

Health-care coverage for retirees tends to be more expensive because they are older and tend to use more medical services, particularly prescription drugs, analysts say. Most stay on employer-sponsored retiree plans until they are 65 when Medicare coverage kicks in and they will then only need an employer-sponsored supplemental policy, which typically includes drug coverage.

But such supplemental policies are going up, too - often double and triple what retirees have been used to for much of the last decade.

Ralph Kolderup, a retired regional sales manager for the former Ameritech, now SBC Communications Inc., said supplemental coverage cost just $2 a month three years ago. This year, he paid $133 a month and his premium will rise to $224 a month next year.

"To go from zero to more than $2,500 a year is fine if you are working and get annual raises and maybe a performance bonus. But when you are retired, what the hell are you going to do?" said Kolderup, 65, of Palatine, Ill. "Your income levels are stable unless you want to go back to work when you are 65. Most of us know health-care costs are spiraling out of control in this country but this raises a question. What is going on?"

SBC is like an increasing number of companies being forced to raise premiums on retirees because of corporate budgeting maneuvers implemented several years ago that set a cap on future retiree obligations. In SBC's case, the company created such a cap in the early 1990s and told workers they some day faced the possibility of paying a portion of their medical premiums if they rose above the cap. The cap kicked in last year, triggering large increases in retiree contributions.

Because of the dramatic increase in health-care costs over the years, the caps are starting to kick in at companies across the country. About half of all employers offering retiree medical benefits report having such caps, according to a study by the Henry J. Kaiser Family Foundation and benefits firm Hewitt Associates.

"Ten years ago, a lot of companies reduced their liability by putting in caps, and that future deferral is now hitting retirees," said Todd Swim, benefits consultant with the Chicago office of Mercer Human Resources Consulting. "The only way companies can manage that liability without drowning is to institute these caps."

In the future, retiree medical benefits may not even be around for current employees given the current trend, analysts say. Already, one in five large employers say they are going to eliminate retiree coverage for "future retirees," typically new or recent hires, within the next three years, the Kaiser-Hewitt analysis indicates.

"SBC is among the declining number of companies that are offering health-care benefits for retirees," said SBC spokesman Walt Sharp. "Because of that double-digit increase in the cost of care, it has increased since."

Today, SBC said retirees are contributing 30 percent of their total costs, which is still below the national average of about 40 percent depending on the size of the company, benefits analysts say.

"Retirees who have medical coverage have been so well treated with low-cost coverage that any change looks awful but it is going to get worse," Swim said.


Pros and cons of older workers:

Top five advantages:

-More willing to work different schedules

-Serve as mentors

-Invaluable experience

-Stronger work ethic

-More reliable

Top five disadvantages:

-Don't keep up with technology

-Cause expenses to rise

-Less flexible

-Don't have same drive

-Require more training

-Source: Society of Human Resource Management Older Workers Survey. Based on interviews with human resource managers


An aging work force

-Number of workers ages 25 to 54 will increase by 5 percent between 2001 and 2010

-Workers age 55 and over will increase 46.6 percent

-Older workers made up 34.5 percent of 2002 work force, compared to 29.4 percent in 1993

-Labor force growth has steadily declined since the 1970s

Source: U.S. Bureau of Labor Statistics, Society of Human Resource Management, Minnesota Demographic Center

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(c) 2003, Chicago Tribune. Distributed by Knight Ridder/Tribune News Service.

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