About half of American retirees quit working sooner than planned, usually because of health problems or layoffs, according to a May 2006 Los Angeles Times article.(1) While 40 percent retired earlier than expected, just 13 percent of retirees worked past age 65 compared with 45 percent of current employees who say they plan to do so. As more companies default on pension and health insurance provisions, many would-be retirees find they need earnings and/or benefits to bolster their retirement savings. Those who retired earlier than they had hoped cited health reasons, job loss, or the need to care for a family member.

American retirees from the “Big Three” Japanese auto companies—Toyota, Honda, and Nissan—have an entirely different pension agreement than peer retirees from the American “Big Three”—Chrysler, Ford, and General Motors (GM), The New York Times reports.(2) Japanese companies structure benefit packages so that retirees shoulder a much bigger portion of their retirement costs and risks. At Toyota, retirees have an investment account in which the company deposits 5 percent of the worker’s earnings each year. Farsighted workers can supplement that with a 401(k) plan, which the company will match up to a set maximum. Instead of a defined monthly pension check, the retiree is dependent on their contributions and the financial markets. At age 65, retirees are no longer covered by the company health plan. Instead, they are paid a lump sum to buy a Medicare supplement. Toyota’s 2006 pension benefits are expected to cost less than a tenth of GM projections.

Of the major Japanese automakers, only Honda still guarantees pensions for their American retirees. Retirees of American automakers receive monthly pension checks, and most of their health expenses are covered. But in a short 15-year span, from 1990 to 2005, GM’s workforce shriveled to one third its former size. Now retirees and their dependents outnumber current workers three to one. GM’s unfunded liability of $85 billion for future health care costs for workers and retirees is at least seven times the company’s market value. GM estimates that each of their American-made vehicles costs an added $1,500 to make due to health care costs alone. Chrysler estimates their health care costs at $1,400, and Ford claims their cost is $1,100.

Possible Implications for Kentucky: Free health care and defined pensions were the norm in retirement packages planned in the mid-20th century. Offering generous retirement benefits seemed less expensive at the time than paying higher wages. Today, defined benefit pension plans are fast being replaced by defined contribution plans throughout the private sector, making retirement income dependent on the structure of the plan, the investment acumen of workers, and the health of financial markets. At the same time, workers are shouldering more, if not all, of their own health care costs. A Kaiser Family Foundation survey finds that only a third of big companies now offer their retirees health care coverage, half the number that did so in 1988. Already ill-prepared for retirement based on 2000 findings from a statewide survey by our Center, even Kentuckians who thought they were prepared are seeing promised benefits disappear, as companies jettison long-term financial obligations. Ultimately, underfunded pension and health care provisions combined with rising living costs could force more elders into poverty and create higher rates of dependency. In 2005, Kentucky ranked fifth in the nation in elder poverty, a circumstance that compels the attention of policymakers here and at the national level.

Contributing Writers Billie S. Dunavent, Mark Schirmer, Michal Smith-Mello