Local Problems With Retiree Health Benefits Highlight National Issue
Many local governments in the 1990s began using their pension funds to help pay for retiree health care, but now, "in some places, the money for retiree health care is running out and money for pensions is dwindling fast, too," New York Times columnist Mary Williams Walsh writes. According to Williams Walsh, the "troubles foreshadow broader government problems" as state and local governments "never estimated the cost of their retirees' health care move to do so now."
Donald Rueckert -- a senior vice president and an actuary with Aon Consulting, who has been helping state and local governments calculate their unfunded liabilities -- said under new federal accounting rules, the nation's collective unfunded retiree health care liability will be about $1.1 trillion. Many local governments have "been tripped up by misreading actuarial projections and thinking there was 'extra' pension money when there was not," Williams Walsh writes, adding that another "common error has been to spend investment income before it has been earned."
In addition, some local governments "underestimate the rate of health cost inflation" because estimates "typically assume" the rate will slow to 5% in the next few years, even though it "has been running at almost double that, with little sign of slowing," Williams Walsh writes.
According to Williams Walsh, "Relieving the strain on government budgets from rising health care costs will probably mean taking one or more unwelcome steps: tax increases, union givebacks, sales of bonds or public assets, mass-transit fare increases or increases in the cost of other local services." She adds that such measures are "so unappealing that few who understand the problem are pushing them very hard."
The local problems "also offer a sense of the challenge in store on a national scale as the obligations of Medicare and Social Security rise sharply" to cover benefits for baby boomers, Williams Walsh writes. Although Social Security and Medicare maintain two separate accounts, "economists have warned repeatedly" that both programs have "promised benefits well beyond what they can reasonably be expected to pay," according to Williams Walsh (Williams Walsh, New York Times, 12/19).