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Assault on Retiree Benefits

March 27, 2004

Corporations moan loudly about the increasing financial burden they are being saddled with as costs for retiree medical plans soar. But many big employers are avoiding those costs by trimming benefits, capping future liabilities and pushing more of the load onto retirees with fixed incomes.

The pain is exacerbated by a complex corporate accounting rule, described earlier this month in a lengthy Wall Street Journal article, that produces an instant profit for companies that cut or cap retiree healthcare benefits. Making matters worse, the Medicare prescription drug reform bill that Congress passed in November promises yet another round of financial rewards for companies that whittle away at their obligations to retirees.

Corporations have reason to worry about healthcare costs. General Motors recently noted that its future healthcare obligations for retirees and current employees total more than $63 billion, adding about $1,400 to the cost of each car and creating a burden not fully shared by automakers in Japan and Germany, which have nationalized their healthcare systems.

The accounting breaks are helping to push employer-paid retiree healthcare benefits into extinction. Only 29% of large employers (which are more likely than smaller companies to offer coverage to pre-Medicare-eligible retirees) offered such benefits in 2003, a dramatic decrease from 46% 10 years earlier. Workers lucky enough to retire with a medical benefit are increasingly being asked to pay all or most of the premiums.

Which leads to an ugly Medicare subsidy that will hurt all taxpayers. The subsidy is supposed to reward employers for maintaining benefits when Medicare starts offering drug coverage in 2006. A noble idea, but Congress approved an incredible loophole: An employer can qualify for a subsidy even if the healthcare benefits in question are largely or entirely financed by retirees' private contributions.

That's the wrong prescription for a country in which healthcare is increasingly out of reach even for working Americans. The federal Centers for Medicare & Medicaid Services predicts that spending for drugs will represent a third of out-of-pocket healthcare spending within a decade.

As the law stands, corporations have the right to eliminate or cap benefits long promised to retirees. But lawmakers should fix an accounting rule that, in effect, rewards corporations with instant profits simply for swinging the ax. It's the least that Washington can do for American retirees.

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