According to a new report from research firm Towers Watson, major American employers (as represented by the Fortune 1000) are facing a huge, largely unfunded $285 billion dollar retiree medical liability as of 2013. Towers and Watson derived the data for their report from Securities and Exchange Commission financial disclosures as of December 31, 2013.

Of note, the total retiree medical liability for 2013 for the Fortune 1000 was $285 billion, down from $338 billion in 2012. The TW report noted that the decrease was primarily related to increases in discount rates.

Retiree Medical Liability

Half of Fortune 1000 have retiree medical liability

The data from the Towers Watson report highlighted that that 501 Fortune 1000 companies currently have retiree medical liability on the books, meaning 499 do not. Of particular note, among the 501 companies that do carry retiree medical liability on the books, more than 67% had zero assets backing the liability.

Statement from Towers Watson

“While total liability for retiree medical is in the billions — much of it unfunded — the undercurrent issue is that companies are exposing themselves to the risk of a variety of unknown variables with adverse consequences,” said Mitchell Cole, managing director of Towers Watson Retiree Insurance Services.

Risks from unfunded retiree medical liabilities

  • Volatility of the discount rate makes the liability highly unpredictable — according to a Towers Watson analysis, a 1% decrease in the discount rate will on average increase the balance sheet obligation by 12%. This situation is especially problematic for firms with unfunded or underfunded plans. As of October of this year, discount rates have decreased by about 80 basis points since year-end. Assuming this trend continues, or yields don’t recover soon, businesses can expect significant losses due to market movements for their year-end 2014 disclosures for retiree medical obligations.
  • Tax reform legislation could eliminate billions in deferred taxes — One particularly scary scenario involves Congress passing tax laws eliminating or reducing the tax deductibility of amortized retiree medical obligations. This would be a huge blow to companies counting on those tax deductions. The tax deduction for employer contributions to health plans is one of the biggest tax expenditures for large companies, and various branches of government have suggested eliminating it to raise revenue.
  • Longer life expectancies are likely to up the projected obligation — Retirees are also living longer today, which means higher liabilities for plans funding their healthcare expenditures. According to an independent analysis of very recent mortality tables from the Society of Actuaries, future retiree medical liabilities are projected to surge up by 8% to 10% by the end of 2014 or in 2015.