The Uncertain Promise of Retiree Health Benefits.

Marcis, John G.

The Employee Retirement Income Security Act of 1974 (ERISA) established a federal program to insure that an employee received promised pension benefits when the employee's pension plan is underfunded. Unfortunately, the protections provided by ERISA do not extend to retiree health benefits. With the aging of the working population and the rising cost of health care, employers are questioning their ability to continue offering retiree health benefits at the level which had been provided in the past. The central issue of this book is the certainty of the promise of retiree health benefits.

The main body of the book consists of ten chapters and a brief appendix by Warshawsky. After the text by Warshawsky, the book also presents the views of both academic and business experts on the future availability of retiree health benefits. The eight commentaries presented were based on a seminar held at the American Enterprise Institute to explore the implications of Warskawsky's findings.

After an introductory chapter, the text by Warshawsky is divided into three sections. The first section describes the institutional environment surrounding retiree health benefit plans. Chapter Two describes the features of a typical group health plan, the coordination of a retiree's health benefits with Medicare and the favorable treatment of certain prefunding provisions of health benefits in the federal tax code. This discussion serves as the foundation for the remainder of the text. Chapter Three reviews the statutory requirements of retiree health plans. The first part of this chapter reviews the guidelines and laws pertaining to such benefit plans. The second part of this chapter examines the Retiree Benefits Bankruptcy Protection Act of 1988 that applies to the provision of retiree benefits when an employer has entered bankruptcy proceedings. Prior to this law, retirees were often last in the creditor queue in bankruptcy court. This act placed retiree health benefits among the first issues to be addressed in such proceedings. Chapter Four examines an employer's rights to terminate or amend retiree health benefit plans. This chapter discusses the three views which have emerged from federal court decisions pertaining to such actions and reviews the more important court decisions. Chapter Five examines the financial accounting standards which evolved during the 1980s regarding retiree health benefits. Although the Financial Accounting Standards Board (FASB) viewed retiree health benefits as a form of deferred compensation very early in the 1980s, it was not until December 1990 that the FASB formally adopted accrual accounting standards for retiree health benefits.

Chapters 6, 7, 8 and 9 constitute the second section of the text. These chapters discuss the economic environment which shaped and continues to shape retiree health benefit plans. Chapter Six reviews four major surveys regarding the number of retirees covered by various health plans. Warshawsky is able to compare the results of the surveys and present a number of common findings despite the differences in terminology, the statistical techniques used and the time periods covered in the four surveys. This chapter also reviews four major surveys of the firms and industries which offer health benefits to retirees. Chapter Seven expands upon the findings of the previous chapter and investigates the demographic, economic and institutional trends which are influencing the magnitude of retiree health benefits. Warshawsky reproduces projections from a number of sources and presents a concise treatment of how such trends as early retirement, health care inflation and the expansion of federal health programs have contributed to the total cost of health care in general and retiree health benefits in particular. Chapter Seven concludes with a short, but informative, section on the protective attitudes of retirees receiving health benefits.

Chapter Eight creates a simulation model and generates estimates of the costs, accrued expense and liability of retiree health benefits for several demographic groups under several scenarios. The model entails the calculation of the expected present value of future health benefits to be received during retirement. Warshawsky explicitly states the assumptions which underlie the choice of the value of the discount rate, the value of the expected inflation rate of future health care costs and the inclusion of various demographic variables. Chapter Nine extends the simulation model developed in the previous chapter to 676 companies which could be identified from 1987-1989 annual reports as providing health services to retirees. The results of the simulation indicate that if the new FASB requirements adopted in 1990 had been implemented in the 1987-1989 period, the reported earnings of these 676 companies would be reduced by approximately 30 percent!

The third section of the text is Chapter Ten and details the policy environment. Three points are discussed in this chapter. The first point concerns the inability of Congress to deal with the general issue of retiree health benefits. Congress, with the support and cooperation of the American Association of Retired Persons (AARP), passed the Medicare Catastrophic Coverage Act of 1988 (MCCA). Although MCCA expanded Medicare coverage, it was financed by a progressive financing schedule on the elderly recipients. After protests from the elderly, Congress repealed MCCA in 1989. Warshawsky questions Congress' future willingness to deal with difficult questions related to retirees and health benefits. A second point of interest in this chapter is the five major policy goals which Warshawsky feels should be addressed in any policy discussion of retiree health benefits. Finally, two policy options are discussed and evaluated in terms of the policy goals outlined. The two policy options discussed are maintenance of the status quo and the adoption of an ERISA-form of retiree health benefit plans. The latter option entails the construction of a government agency similar to ERISA but the plan would reflect the unique characteristics of retiree health care benefits.

The text was well-documented, informative and insightful. I found the presentations by the commentators and the resulting exchange between Warshawsky and the commentators to be both provocative and stimulating.