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Rx For Retiree Health?

Substituting the S&P 500's rate of growth for medical inflation could make retiree healthcare palatable to shareholders

By Staff Writer | Updated on September 01, 2006

Ever since the implementation in 1993 of FAS 106, corporations have been required to make actuarial projections of future health benefit liabilities using an assumed medical inflation rate and record the discounted value of the projected liabilities on the balance sheet. This change increased corporate awareness of the potential magnitude of the liability and made the income statement more sensitive to changes in medical inflation. Although the actuarial value of the liability may not be the true economic cost, the corporate response has been to limit materially retiree health benefits, guaranteeing a reduction in both the actuarial and the economic value of the program.

At a time when it is increasingly difficult to attract and retain qualified workers, this is an unfortunate–and perhaps unnecessary–consequence. Given that retiree health is an immensely attractive and valuable benefit to employees, it may be time for corporations to re-think their position and consider alternative plans that balance the value of the retiree medical benefit to the employee with the economic cost to the shareholder.

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