Although concern about health care in America is widespread and growing, few Americans are aware of the pending crisis in employer-provided retiree health benefits. As with the savings and loan fiasco, this crisis is an obscure, largely “hidden” problem, that could erupt in the next few years as a major scandal. While the savings and loan bailout could cost taxpayers a staggering $500 billion, the retiree health benefit crisis could cost as much as $2 trillion. If we are to effectively confront the pending crisis, we must not only recognize the problem, but understand its history and causes.

Employers began to offer health care plans as a fringe benefit to employees over fifty years ago. Since 1954 employer-provided health benefits have been excluded from an employee’s taxable income. Such tax policy has strongly encouraged employers to provide health care coverage as a non-cash, tax-deferred element of compensation. The employees naturally preferred to receive tax-free employer-provided group health insurance rather than the equivalent taxable salary raise. Not surprisingly, by the late 1950s employers provided eighty percent of the work force with health insurance benefits.

With the adoption of Medicare in 1965, many businesses began to offer retirement health coverage to their employees. This coverage, known as “Medigap,” was intended to insure retirees for expenses not covered by Medicare. By 1986, roughly two-thirds of the work force participated in employer provided retiree health plans.