Raley's will stop providing health coverage to its retired hourly employees 65 and older in July 2012, the supermarket chain said in a letter to retirees.

The letter, dated Oct. 24 and signed by Michael Teel, Raley's president and chief executive officer, said the chain is struggling to maintain profitability amid a down economy, increased competition and escalating health costs.

"Unfortunately, due to the economic downturn and increased competition we are struggling to sustain our business," the letter read. "We have … determined that Raley's can no longer cover the cost of this benefit."

Raley's declined to comment Friday, but Jerry Landers, its senior director of human resources, issued a written statement reiterating the reasons for the change given in the letter.

The statement also noted, "We are continuing to provide generous medical coverage for our retirees under the age of 65, which is the most expensive time for individuals to purchase their own plans."

But retired hourly workers over age 65, like Shirley Kinnett, 75, of Sacramento will have to pay for the coverage out of pocket starting July 1, 2012, carving out cash from a fixed income.

"I know retirees are going to be distraught by this. They've got to be," Kinnett said.

The former accounts payable clerk worked 19 years for the West Sacramento-based grocery chain before retiring at 63 in 1999.

Her retirement plaque still hangs on the wall in her home office, the inscription lauding her "conscientious and excellent performance," and wishing her good health and happiness in retirement.

Kinnett pays $120 a month into the Raley's plan now, up from $50 three years ago.

Raley's has arranged for retirees to receive group rates on plans from Hartford Life & Accident Insurance Co. and Kaiser Permanente – which have similar benefits to the Raley's plan. Hartford's plan is more than $300 per month and Kaiser's is about $240.

Raley's reserved the right to alter or cancel retirees' health insurance coverage years ago. Kinnett leafed through a long-ago employee handbook to point out the one-sentence disclaimer.

"They covered their bases, but there are people 75 and over who cannot afford $306 a month, especially when Medicare takes $100 a month," she said. "That's $406 on a fixed income."

Kinnett's story has become increasingly common as employers abandon retiree health benefits.

About a quarter of large firms like Raley's – 200 or more employees – offered retiree health benefits in 2011, according to the Kaiser Family Foundation, and a portion of those offered them only to those under 65, too young for Medicare. That is down from 32 percent in 2005 and 66 percent in 1988.

The seeds of declining coverage were planted in the early 1990s when employers had to start accounting for future medical costs, said Larry Levitt, senior vice president of the Kaiser Foundation.

"That prompted the decline in the availability of retiree health benefits," he said. "Escalating costs became very big factors."

Today's down economy and rising health costs for employers continue to drive the trend.

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