Another Retirement Benefit Gets the Axe

Broken promises make for lousy relationships, which is one reason public sector workers and their employers are on the outs. Many government entities promised rich pensions to their workers and are now trying to back out of the deal as the costs skyrocket.

After cities, states, and other entities failed to contribute the recommended amount to their pensions for years, the financial crisis pummeled the assets even more. All the while, workers got older and the ranks of retirees grew, driving the costs higher.

Now we’re faced with $1.1 trillion in in unfunded liabilities, at least according to those who sponsor such pensions. Independent watchdogs put that number close to $3.9 trillion.

Either way, any problem where the monetary solution starts with a “t” is a big deal.

But at least many of these pensions have a constitutional guarantee — even if the money isn’t there.

We can’t say the same for another problem child of public sector employment…

Other Post-Employment Benefits (OPEBs) — a bureaucratic term that covers mostly health care — is quickly becoming an embarrassment as well.

Retirees who are 65 or older qualify for Medicare, but millions of public sector workers retire years before then. Many quit work in their 50s. They rely on retirement health benefits from their previous employer to pay for care in the years before Medicare kicks in, and use those same benefits as a supplement once Medicare starts.

The total unfunded liability for this category is somewhere between $270 billion and $528 billion, depending on whom you ask.

Like pensions, this might seem like yet another insurmountable problem for public sector employers, but when it comes to healthcare, these people have a plan. They would like to kick retirees out of their health programs and have the individuals apply for coverage on the new healthcare exchanges.

That’s where the U.S. Supreme Court steps in.

In January, the Supreme Court ruled in M&G Polymers USA, LLC vs. Tackett that a health care agreement between the company and retirees is only in effect during the current employment agreement and does not represent a vested benefit for life. When the agreement expires, the benefits are subject to change.

This is very different from pensions, which are constitutionally guaranteed in many states and have clear safeguards under the Employee Retirement Income Security Act (ERISA). This ruling will let public employers contemplate ending or at least severely curtailing their retiree health care benefits, potentially driving millions of retirees to the health exchanges.

If pushed onto exchanges, most of the retirees would qualify for at least some level of subsidy. But there’s no free lunch. The money for the subsidy has to come from somewhere, or more importantly, someone. That someone is you and me.

The Affordable Care Act (ACA) pays for subsidies by levying fees on medical devices, higher capital gains tax rates for high income workers, and taxes on high-cost (Cadillac) health plans. The more people who qualify for subsidies that end up on the exchanges, the more taxes people and companies will have to pay.

For anyone wondering if this will really happen, the writing is already on the wall… or should I say, the money is already missing from the account.

While public pensions are woefully underfunded at about 69% of what they owe, at least employers have been trying to fund these liabilities. When it comes to health care, only 32 states have any money set aside at all. The average funding rate is 7%.

Not 70%. Just 7%!

When states have been asked about the minimal amount of money set aside for health care benefits compared to pensions, they respond that retiree health care benefits are subject to change and aren’t contractual liabilities. Therefore, they don’t have to be treated the same as pensions.

While that’s probably news to most public sector retirees who are counting on these benefits, apparently it’s been the view of the employers for years. They’ve already taken steps to limit benefits, require higher contributions from employees, and shift more cost of care to retirees.

Even though the location of the pieces on the chessboard might shift, the game remains the same. Retired public sector workers are still retired, except now they have fewer benefits.

Plan sponsors are doing what they can to lower their expenses in the face of rising costs, but the retirees still need care, and someone still has to pay for it. The fact that states and other public employers did little planning and saving might be shameful, but it won’t change the situation. One way or another, this burden will be spread across the nation.

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Rodney

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Categories: Economy

About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.