NCPA - National Center for Policy Analysis


May 18, 2006

Taxpayers will soon get a surprise bill that could exceed $1 trillion for the cost of paying future medical benefits for state and local workers who retire, say observers.

Retiree medical costs are the biggest long-term challenge that state and local governments face. By comparison, state and local pensions have an unfunded liability of about $500 billion.

  • State and local governments have set aside $2.5 trillion to help pay pension benefits for 19 million civil servants and 7 million retirees. But they have set aside almost nothing to pay for retiree medical benefits.
  • New accounting rules require that governments, starting next year, put a price tag on the value of medical benefits promised to civil servants when they retire. New York City's liability, for example, approaches $50 billion. The city's total budget last year was $53 billion.
  • The federal government also has a $2.3 trillion unfunded liability for medical and disability benefits promised to civil servants and military personnel who retire. The costs are not the nation's biggest financial problem. Medicare has a $33.4 trillion unfunded liability. Social Security has a $4.6 trillion shortfall.

The impact on taxpayers of retiree medical care will vary widely, say observer:

  • Minneapolis has no liability because it doesn't offer retiree medical benefits.
  • Duluth, Minn., however, has a burden equal to about $8,000 per household for the free lifetime medical benefits the city promised workers and their families.

Source: Dennis Cauchon, "Huge bill for public retirees hits soon," USA Today, May 18, 2006.

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