Who Should Pay For Health Benefits?

When Don Jones went to work on the tire line at Goodyear in 1970, he says the company promised him free health-care coverage for life. Those generous medical benefits came in handy when Jones suffered a series of heart attacks that led to a transplant after he retired in 1993. But as health-care costs soared, the company began charging him for coverage. He now pays about $215 a month in premiums and prescription co-pays, more than half his monthly pension of $385. Last year, though, Jones's union, the United Steelworkers, agreed to take over running the retiree medical plan from Goodyear. "I actually believe my benefits will get better" when the deal is completed in the next few months, says Jones, 68. Goodyear should be optimistic, too. By funding a special health-care trust run by the union, it gets out from under an estimated $1.2 billion in future retiree medical obligations.

A reckoning for retirees is coming. With tens of millions of boomers entering their 60s, companies must now pay for past promises of lifetime medical benefits. The costs of providing health-care insurance have risen 78 percent this decade, according to a study by the Kaiser Family Foundation and Hewitt Associates. And that has caused many companies to drop coverage for retirees while others feverishly cut benefits. Last year three quarters of big American companies increased premiums for retirees under 65, and 58 percent raised rates on Medicare-eligible pensioners, according to the study.

Nowhere is the pain more acute than in Detroit, where General Motors, Ford and Chrysler are confronting a lifetime retiree medical tab of $100 billion. Providing medical insurance for 540,344 retirees and 180,681 workers adds about $1,500 to the cost of every car Detroit builds—which goes a long way toward explaining why America's automakers lost a combined $15 billion last year. So the car companies are taking a cue from Goodyear, negotiating with the United Auto Workers to rid themselves of their retiree medical obligations by setting up a union-controlled trust known as a voluntary employees' beneficiary association, or VEBA. (Among the benefits to employees: if an employer goes bankrupt, the retirees' medical plan is protected from hungry creditors.) The deal could become a template for all of America's 15.4 million unionized workers, from factories to classrooms to cop cars. "There's no doubt that whatever the auto companies and the UAW come up with will be precedent-setting," says health-care analyst Frank McArdle of Hewitt Associates. "This is being closely followed."

In contract talks that have stretched well beyond a Sept. 14 deadline, GM and the UAW are haggling over how to create such a trust. The companies want to kick in about $70 billion to fund the trust, analysts say. That would wipe retiree health-care expenses off their books, which would immediately improve their credit ratings, cut costs and free up cash for other uses. To raise money, the automakers are having a garage sale—Ford is looking to sell off Volvo; GM has already given up control of its finance arm, GMAC. Still, they'd need to fill the fund with other assets, like stock or even real estate. One scenario under consideration: GM turns over some of its factories to the UAW and then leases them back from the union. Yes, that means the union would be GM's landlord.

The union, however, wants more money in the fund—closer to the companies' entire $100 billion obligation. The UAW may have good reason for wanting more. A retiree health-care fund set up by Caterpillar in 1998 went broke in 2004 when it couldn't keep up with runaway medical bills. That left retirees like Larry Solomon, 65, on the hook for $2,400 a year in premiums, plus hundreds more in deductibles and co-pays. He spent nearly 35 years building tractors for Caterpillar in Decatur, Ill., and says unions have no business taking on the risk of doling out medical benefits to retirees. "Companies that are using up the lives of their workers," says Solomon, "are obligated for the health of those workers." But that postindustrial compact, born of a bygone American age of affluence, is being rewritten in Detroit.