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For decades, U.S. workers have faced a sea change in the way their employers provide for their retirement. As companies move away from providing benefits themselves and toward putting responsibility on workers to handle their own retirement finances, changes to long-standing benefits and the policies that govern them are putting pressure on workers to figure out how to bridge sudden gaps in the support they expected to receive.
One big area in which retirees and near-retirees have seen big changes in recent years is in health care coverage. With the recession and financial crisis having stretched many employers to the breaking point and new health reform laws taking effect, the critical question to ask is whether employers should provide coverage for retired workers at all -- and if so, what should their role be?
The health care cost burden
Health care costs have been among the fastest-growing expenses for years. With older workers and retirees requiring far more health care services than their younger counterparts, those higher costs fall squarely on them and the employers that provide health coverage for them.
But increasingly, employers have started to shift more of the cost burden of health care onto their current and retired workers. With moves toward less inclusive coverage such as high-deductible health plans combined with health savings accounts, employers have tried to give workers more of an incentive to control their health-related expenses, rather than relying on full coverage to pay whatever they need. Meanwhile, retirees similarly face increases in premiums, copayments for services, and yearly deductibles that they have to cover out-of-pocket before coverage kicks in.
Companies, subsidies, and you
One particularly controversial aspect of retiree health coverage comes from the effect of recent health care reform laws on money that employers have traditionally received from the government. As The Wall Street Journal described earlier this month, when Medicare started covering prescription drug expenses in 2004, many employers figured they would simply drop their own retiree drug coverage since their former workers would be eligible for the Medicare benefit.
Because the government didn't want to shoulder the entire cost of those retirees, it provided subsidies to companies to finance part of the cost of coverage. The subsidy amounts to 28% of coverage costs up to $1,330 per retired worker. For employers with large populations of retirees, that adds up to big money -- about $1.5 billion each for Verizon (NYSE: VZ ) and AT&T (NYSE: T ) over the next 10 years, according to company estimates.
Until recently, companies were able to take that $1,330 tax-free while also deducting the full amount of what they spent on coverage. But the new health care reform laws will require companies to reduce their deduction by the amount of tax-free subsidy money they receive. That in turn forced Deere (NYSE: DE ) , Caterpillar (NYSE: CAT ) , and many other companies to take big charges against their earnings to reflect the increased tax cost of the subsidy.
In return, though, health care reform has added new subsidies to give companies incentives to keep early retirees who aren't yet 65 and eligible for Medicare on their books. AT&T, Verizon, and General Motors (NYSE: GM ) were among those getting the subsidy, which reimburses the majority of health care claims up to a certain dollar limit per former employee.
Don't get dizzy with all the money-shuffling
Whenever this much money moves back and forth between the government and private industry, there's potential for waste and abuse. If the government's subsidy program effectively shoulders the burden of retiree health costs, it starts to look like there's no reason to keep employers involved at all. Politically, though, the idea of a massive government takeover of health care is so repugnant to many that the cover of running government money through the private sector is paramount to providing retiree health coverage.
At this point, retirees and workers are happy to get coverage from wherever it's available. The key is making sure it includes enough benefits at a reasonable cost. As many employers cut back on the breadth of their health care coverage, they're setting the stage for a future in which employees are on their own for both their retirement savings and their medical costs.
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