Despite a federal lawsuit, Chicago Mayor Rahm Emanuel said Wednesday he will move forward with a plan to phase out taxpayer-funded health care subsidies for tens of thousands of retired city workers starting next year.

The cost-cutting move is expected to save the city about $18 million in 2014, when City Hall is staring down an estimated $338.7 million budget hole.

The city’s oldest retirees would get to keep their subsidies of up to 55 percent, thanks to an earlier federal legal settlement. But about 21,100 retirees and 9,100 spouses and dependents would see their city-paid subsides reduced, until those payments are zeroed out by 2017.

“As I told everybody, we’re gonna deal with the hard truths and not run away from ‘em,” Emanuel said Wednesday after a public roundtable with small business leaders.

“[We] are gonna make changes over a three-year period of time as the healthcare landscape is also changing,” he said.

The city is expected to spend about $103 million on health care subsidies by the close of 2013, according to Kelley Quinn, a spokeswoman for Emanuel’s budget office. Next year, payments would drop to about $85 million as the city begins the three-year phase-out. That’s if the plan survives a challenge currently playing out in federal court.

Workers hired between Aug. 23, 1989 and July 1, 2005 would see their city subsidy drop from 55 percent to 41.25 percent. Payments for workers hired after that will drop to between 30 percent and 37.5 percent, depending on how long the employee has worked for the city.

Emanuel’s office is refusing to reveal how much the city subsidies will shrink during 2015 and 2016.

About 4,000 of the city’s oldest retirees will get to keep their city subsidy of up to 55 percent for the rest of their lives.

After the city phases out its retiree health care subsides, Emanuel’s office says retired workers who aren’t eligible for Medicare will have the option of buying insurance through the Affordable Care Act, sometimes called “Obamacare.”

A Chicago lawyer filed a class action lawsuit in September arguing that Emanuel’s move violates a part of the Illinois Constitution that states pension benefits “shall not be diminished or impaired.”

Emanuel is set to introduce his 2014 budget proposal to the City Council on Oct. 23. He has ruled out raising property, sales or gasoline taxes, but has not closed the door on other possible tax hikes.

Alex Keefe covers politics for WBEZ. Follow him @akeefe.