SFAS No. 106 and Benefit Reductions in Employer-Sponsored Retiree Health Care Plans

The purpose of this study is to determine the prevalence, magnitude and timing of retiree health care benefit reductions and to identifydeterminants of the benefit-reduction decisions. Three explanations for these benefit reductions are examined: (1) increased contracting cost caused by the financial reporting conse quences of SFAS No. 106, (2) financial weakness independent of SFAS No. 106 and (3) firm-specific increases in retiree health care costs. Strong support for the increased contracting cost hypothesis is found after controlling for industry, financial weakness and firm-specific changes in retiree health care costs. However, the results also indicate that firms cutting benefits are financiallyweakerand have higher retiree health care costs at the time benefits are reduced. Therefore, SFAS No. 106 cannot be viewed as the sole cause of the health care benefit reductions.