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It must have been a no-brainer back in post-World War II industry when every employer needed more workers to staff the assembly lines in the booming manufacturing plants. Everyone was buying automobiles, appliances and furniture for their new suburban houses.

Sweeten the contract negotiations with a little extra medical coverage for retirees, and everyone will be happy. It can't cost very much--and it didn't to start.

Most retirees wouldn't even live more than a handful of years beyond retirement age back then. So who would have expected that 60 years later, the decision would create one of the largest employer financial risks--and force companies like General Motors to put a bounty on employees who still have the promise of coverage?

That's what happened in March, when the giant automaker with the suffering bottom line announced a buyout plan that offered tens of thousands of hourly workers up to $140,000 each to forego medical and other ancillary retirement benefits.

It seems like a huge amount of money to throw around. After all, this isn't a billion-dollar class action lawsuit or giant environmental cleanup; it's just health insurance.

However, since 1992 when Financial Accounting Standards Board Statement No. 106 forced employers to start accounting for their retiree medical benefits promises, the value has been escalating--probably faster than the cost of corporate torts.

According to Fidelity Investments in Boston, which annually calculates the individual cost of post-retirement health care, individuals retiring in 2006 can expect to need at least $200,000--an increase of about 5.3 percent from last year. Since Fidelity began its estimates in 2002, the amount has increased about 5.8 percent.

The company attributed the increase to continued health-care cost increases, running three times consumer inflation and 2.5 times faster than the growth in worker earnings. The estimate is moderated by the increase in government programs for retirees, including Medicare Part D prescription drug coverage.

For individuals, the estimate is a wake-up call to start saving more aggressively for retirement. Fidelity recommends they take advantage of health savings accounts, which allow employees to save unused funds against retirement medical expenses. For employers, it is an air-raid warning siren.

The Fidelity estimate includes premiums and copays and out-of-pocket expenses for Medicare Part B and D, but not the value of the benefits received by retirees participating in the government programs. The estimate does not include dental benefits or long-term care.

For retirees with employer-sponsored medical coverage, the employers bear the cost of delivering some of those benefits--which could include $50,000 for bypass surgery or up to $200,000 for the first year of heart or lung transplant costs. And as retirees take more prescription drugs to live longer, the cost of those drugs could be $10,000 or more a year for 20 years or more.

At those prices, $140,000 is a bargain for employers--and makes the GM plan seem like sensible risk management.

For employees, it's not really a great deal. Even with Medicare benefits, they are likely to come up about $60,000 short.

LEN STRAZEWSKI, a professor and benefits expert, is a columnist for Risk & Insurance®.

May 1, 2006

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