Pensions Today, Health Care Tomorrow?
Monday, March 13, 2006
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General Motors is once again the bellwether for the American economy, although probably not a way that makes it happy. GM's decision to freeze its defined benefit pension plan moved this trend from the business pages to the front pages of the nation's newspapers and triggered a blizzard of advice to guide employees through what promises to be a brave new world.
I'm not going to repeat the gory details here; they have been well documented elsewhere. GM is a company on shaky financial footing, currently losing billions a quarter, and maintains it can no longer afford to promise retirees a guaranteed pension benefit. Similar arguments have been made by bankrupt companies like UAL. But it has also been made by companies with seemingly strong balance sheets like IBM. Size doesn't seem to matter either. Giants like Verizon and Motorola, solid, profitable companies, have frozen their plans in recent years. But so too have some small companies like the Community Television Foundation of South Florida, producer of Nightly Business Report. So trust me, if you're going through this trauma with your employer, I feel your pain.
Employees without defined benefit plans are usually left with defined contribution plans, generally 401(k) plans in which they can put some of their earnings. Companies may, or may not, contribute to those plans but in any event the amounts available at retirement will depend on the success of the investments made with those contributions over the years. And when the funds run out, that is that. They are not guaranteed for life.
The irony here is that Congress, in creating the 401(k) program, intended these accounts to supplement standard pension plans, not replace them. But the companies clearly want out of the pension business. An Analysis of Frozen Defined Benefit Plans, a report by the Pension Benefit Guaranty Corporation, says nearly one out of ten of the plans it covers had been frozen as of the end of 2003 and that the number almost certainly increased in the past two years.
And now there is anecdotal evidence that company paid health programs may be the next benefit to go. Already companies have responded to the explosive increase in health care costs by raising employee contributions to insurance plans, raising co-pay and deductibles and encouraging employee participation in managed care. Some have decided to offer employees only Health Savings Accounts.
The HSA accounts are new, created by law at the end of 2003. They let an employee put pre-tax earnings into an account to be used for health care expenses. An employee who uses an HSA must purchase a so-called "catastrophic" insurance policy which pays benefits after a high deductible is met. These policies usually have much lower premiums than traditional health insurance. Like the 401(k), the employer may or may not contribute. Unlike the flexible spending accounts which have been around for some time, there is no "use it or lose it" provision. The HSA accounts belong to the employee.
Congress intended the HSA accounts to help the uninsured, often employed by small companies which can't afford regular health insurance plans. But some giant employers like Wal-Mart, often criticized for having little in the way of employee benefits, have seized on HSA accounts as a way of providing minimal coverage while avoiding high cost. While it is too early to have meaningful statistics, reports say where companies offer the HSA in addition to a more traditional plan, it is the younger employees, as a group healthier and less likely to need medical care who have signed up. That certainly makes sense for them since they can reduce costs now and build up their account for the future. But it leaves the older employees, the ones more likely to need benefits, in the traditional plans. Since insurance companies are in the business of making money, not losing it, this will undoubtedly lead to higher premiums. So the unintended consequence of HSA accounts may be to encourage companies now offering traditional insurance plans to drop those plans completely or at least pass on the increase in their premiums to employees.
This trend away from offering benefits by the private sector comes at the same time government is pushing for reductions in the rate of growth of entitlements and the "privatizing" of at least part of the entitlement programs. This one-two punch is a reversal of some fifty years of public and private policy and is understandably generating shockwaves.
My Washington colleague, Darren Gersh, has written on the pension issue and his research shows that a twenty-something at the start of her career, placing 8.5% of her salary in a 401(k), a reasonable amount, and getting a 7% return, a reasonable expectation, would do as well as she would in a defined benefit plan. But a 55-year old would have to save almost 25% of his income to make up for a pension plan freeze. Even assuming one could save that much and still meet expenses, the legal limit of $15,000 a year ($20,000 if your over 50) would make it impossible for a plan participant making more than $80,000 to offset the lost of a defined benefit plan. The bottom line? The fifty-somethings, my cohorts, are going to suffer the most.
So what will happen? It seems clear that generational warfare, already on the rise, will increase. In terms of the public policy, the war will be fought with the ballot box. Older Americans are more likely to vote than younger ones and, with the Baby Boomers reaching retirement age, there will be a large and powerful voting block to be mobilized.
As for the private sector, history shows that employee benefits arose as a significant issue around the time of WWII when companies had to compete for workers with non-wage incentives. The private sector movement away from benefits is especially hard on the older, most experienced workers who demonstrated by their longevity a loyalty to their employers. It comes at a time when the services age is giving way to the knowledge age, just as the manufacturing age gave way to the services age decades ago. It is also a time when the retirement of the Baby Boomers is expected to create labor shortages. The fifty-somethings have the knowledge gained through experience. They also have the numbers. The private sector may regret decisions made today if they lead those employees to leave tomorrow.
