NCPA - National Center for Policy Analysis

Iceberg Ahead: The Hidden Cost of Public Sector Retiree Health Benefits in New York

October 19, 2010

New York taxpayers spend billions of dollars a year on health insurance coverage for retired state and local government employees, many of whom are too young to be eligible for Medicare.  But the mounting "pay-as-you-go" bill for retiree health care is just the tip of a much larger iceberg, says E.J. McMahon, a senior fellow of the Manhattan Institute for Policy Research.

Now, thanks to a new government accounting standard, the true cost of this long-term entitlement is finally emerging from the murky depths of state and local finances.

  • Based on a review of financial reports for the state and its largest local governments, school districts and public authorities, McMahon estimates that New York's total unfunded liability for public-sector retiree health insurance comes to $205 billion.
  • This figure represents a mammoth potential transfer of wealth from future taxpayers to current government employees and retirees -- for a type of benefit that is not available to the vast majority of private-sector workers.

McMahon recommends a four-step plan for curbing retiree health care costs:

  • Preserve health benefits for workers who have already retired, but stop reimbursing Medicare Part B premiums for those over 65 and require early retirees to pay a larger share of their own premiums.
  • Reserve the greatest benefit to those who have worked the longest.
  • Clarify existing law to allow trust funds to cover adjusted other postemployment benefit liabilities, but mandate that required contributions to the fund are based on returns from conservative, low-risk investment strategies.
  • Eliminate retiree health insurance coverage for all new hires and employees on the payroll for less than 10 years, and shift these workers into a "retirement medical trust."  Government workers would make tax-free contributions to accounts managed by their unions, which would pool and invest the money to cover medical expenses after they retire.

Source: E.J. McMahon, "Iceberg Ahead: The Hidden Cost of Public Sector Retiree Health Benefits in New York," Empire Center, October 2010.

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