The old HMO joke used to go, “The best way to make sure you’re covered is don’t get sick.”
Now a graying America has a new not-so-funny twist on it: “The best way to make sure you’re covered is don’t retire. Ever.”
Public employees in California, auto workers in Detroit and others who thought health insurance coverage was part of the deal when they retired are all feeling the pinch of rising costs and beginning to wonder if the deal is off.
California since 1961 has promised employees health care for the rest of their lives if they worked at least 10 years for the state before retiring. The practice was deemed a good way to recruit teachers, engineers, secretaries and other state workers, at a cost of about $60 a year per employee. Retiree health benefits cost the state about $5 million annually then.
The state grew. More employees worked their 10 years and retired. By 2007, retirees began to live a lot longer and health care costs are getting substantially higher, pushing the cost of health care benefits for state retirees up to about $48 billion over the next 30 years.
That’s the figure Controller John Chiang (D) cited in his estimate released last month, within the $40 billion to $70 billion range that the state Legislative Analyst’s Office projected for California’s 370,000 state workers and retirees.
The state pays nearly $1.4 billion annually for retiree health benefits now, but Chiang predicts that figure will increase by as much as an additional $2.2 billion annually in the long run.
To help deal with the issue in California, Gov. Arnold Schwarzenegger (R) at the end of 2006 established the Public Employee Post-Employment Benefits Commission to propose ways for addressing unfunded post-employment benefits. The commission’s first report, “Funding the Golden Years in the Golden State,” is an overview of public employee retirement benefits and recent concerns about how to provide and pay for them.
In testimony before the commission, retired teachers reported their concern that the cost of supplemental insurance and drugs make it harder to subsist on the pension benefits offered by the California State Teachers’ Retirement System. Moreover, a recent CalSTRS survey found that many retirees are taking an increasing amount of money out of their own wallets to cover the cost of health care in retirement and projected that the trend will escalate.
“Rising health care costs, coupled with less coverage by school employers, threatens the retirement of California teachers,” Sherry Reser, media relations manager for CalSTRS, says. “It’s expected that when the new accounting standards for health care costs are implemented next year for the public sector, many school districts may drop retiree health coverage,” Reser says.
“When similar standards were adopted for the private sector, the percentage of employer-provided retiree health plans offered fell from 71% to 41%. That’s partly why the Teachers’ Retirement Board initiated a health benefits task force to help develop practical solutions to the health care problems facing California’s public school educators,” Reser says.
“It is our hope that the commission’s findings will dovetail with the larger California conversation about health care reform,” Reser says.
Retiree health benefits are particularly thorny for governments because they’re usually orchestrated as unfunded liabilities. Unlike public employee pensions, which generally are financed in advance with contributions from workers and taxpayers, health coverage is promised, but the money to pay for it is not earmarked anywhere.
The 12 members of the governor’s commission — six appointed by the governor and six by the Legislature — have been hearing horror stories at public hearings up and down the state.
Representatives of local governments said they’re borrowing through bonds to meet retiree health care obligations, a risky proposition if the market turns downward. Even if the bonds do well, borrowing still increases long-term debt, which brings its own sets of problems.
Chiang recommends the state establish a trust to hold and invest the money owed each year, with the expectation that the money would grow. Where that money would come from each year, however, is not clear and, therefore, not a likely scenario in current political climates.
Governments are not alone in this predicament. Monthly health care premiums have risen 87% since 2000, according to a study released last year by the Kaiser Family Foundation and Hewitt Associates. And those increases hit everyone — retirees and their former employers.
The growing burden of retiree health care costs is one of the biggest challenges facing U.S. automakers. Ford, General Motors and a soon-to-be-independent Chrysler are looking for all kinds of ways to shed what once was considered a standard union benefit. Competitors like Honda, Toyota and others don’t build retiree benefits into their labor packages.
The issue of retiree benefits was a key factor in DaimlerChrysler’s efforts earlier this year to sell its Chrysler Group.
Automakers are considering a plan to turn the long-range health care problem over to the labor union. The automakers each would agree to pour billions of dollars into a trust fund to help provide retiree insurance, but after the one-time payout, carmakers would shed a lot of liability for the long term.
Labor will have to look long and hard at such a proposal. There are more retired autoworkers than working ones, and that isn’t going to change.
Will retiree health benefits be the straw that causes the health policy camel to finally sit down and decide which way it wants to go before its back breaks?
As a huge demographic bulge of baby boomers moves into retirement and medically-expensive old age, economic factors such as changes in health coverage for retirees might succeed in turning discourse toward a national — or statewide — health policy where other efforts have failed.
Retirees ages 65 and older have Medicare but the federal government’s plan does not provide vision or dental benefits or cover all prescription drugs. And, perhaps more importantly, the growing number of retirees who leave work as early as age 55 will need to find health coverage until they become eligible for Medicare.
Ken Jacobs — chair of the UC-Berkeley Labor Center and co-author of a report on employer-sponsored coverage in California and the U.S. — testified that because many local governments are reducing or eliminating post-employment health benefits, some retirees are unable to afford coverage at a time in their lives when they may need it most.
“Even small breaks between leaving work and becoming eligible for Medicare have long-term health consequences,” Jacobs said.
Something — or somebody — has to give, somewhere.
Ultimately, governments and other employers are going to have to reconsider making “health-care-for-life” promises unless current conditions change … if, say, the camel changes course before his back breaks.