Michigan’s Quiet Success in Containing Retiree Health Care Costs [Mackinac Center]:
"It’s not news that government employee pension systems across the nation have promised retirees billions in pensions and not saved enough to make good on those promises.
But a related problem could pose an even greater risk to taxpayers: lifetime health insurance benefits provided through these systems.
Michigan may be showing governments across the country the way to resolve the fiscal challenge, however.
Without much fanfare, the state and many local governments have stopped offering new employees open-ended post-retirement health insurance benefits.
In doing so, they have contained their exposure to ever-increasing premiums that could one day threaten their solvency.
Governments have tended not to set aside money to pay for those benefits as employees work, but rather pay the insurance premiums as they come due.
This means
today’s taxpayers are paying payroll expenses incurred by government employees years or even decades in the past.
This is both unfair and imprudent.
If such coverage is offered at all, a better course would be to place money in a health insurance trust fund as the benefits are earned, just as pension contributions are deposited annually into pension funds.
Such prefunding is what governments are supposed to do with pensions.
Most have fallen short, though.
The latest Pew report tallies nearly $3.7 trillion in pension liabilities that governments acknowledge; stricter pension assumptions can inflate this figure.
Governments have saved $2.8 trillion to pay for pensions, leaving $934 billion in unfunded liabilities.
The retiree health insurance is a smaller, $627 billion gap, but
fewer dollars have been set aside to pay these future benefits.
The size of this gap is even more uncertain than that for pensions, given the employers’ exposure to rising health care costs and premiums..."
