NCPA - National Center for Policy Analysis

Retiree Health Care Benefits Massively Underfunded

January 20, 2015

Public pension funds in states across the country are in trouble, as states struggle to fund their retirement plans at financially sustainable levels. But there's another part of this problem that's even worse: health care benefits for public employee retirees.

Writing in the Wall Street Journal, Brookings Institution Senior Fellow Robert Pozen explains what these health care obligations are. In addition to providing pension benefits, state governments promise to cover the health insurance premiums for their public employees after retirement but before they qualify for Medicare. This can be very expensive, explains Pozen, when workers retire at age 50 yet do not become eligible for Medicare until age 65. Some states also pay portions of retirees' Medicare costs after they qualify for the program.

Sometimes, it doesn't take much to qualify for these benefits -- according to Pozen, public employees with just 10 years of part-time work qualify for health care benefits in Massachusetts.

That these are wildly expensive promises is evident when one looks at how states are struggling to find the money to meet their obligations:

  • Just 11 states in the country have funded more than 10 percent of these health care liabilities.
  • Of the 30 largest cities in the country, only eight have funded more than 5 percent of these benefits.
  • New York City's unfunded liabilities amount to nearly $23,000 per household.
  • A 2009 government report estimates that unfunded health care liabilities in the United States is more than $530 billion, but a 2014 study from the National Bureau of Economic Research says the number could be as much as $1 trillion.

What are states to do? Many are trying to find ways to reduce their obligations by reducing cost-of-living adjustments, increasing deductibles and premiums for retirees, reducing available benefits and lengthening the amount of time it takes for employees to qualify for health care benefits.

States need to find ways to get these obligations under control. Just recently, the NCPA released a study by Jagadeesh Gokhale providing a roadmap for Wisconsin to reform its retiree health benefit system. His suggestions included charging current beneficiaries higher premiums and copayments as well as closing the state's current health care program to new enrollees. For new and younger workers, he proposes opening a prefunded plan that utilizes health savings accounts.

Source: Robert C. Pozen, "The Other Debt Bomb in Public-Employee Benefits," Wall Street Journal, January 16, 2015.  


Browse more articles on Tax and Spending Issues