Funding Public Pensions

Other Post-Employment Benefits Crisis

Other Post-Employment Benefits Crisis 

The issue of “Other Post-Employment Benefits” (OPEB), mainly health care expenses for retirees, is technically somewhat different than the issue of pension plans. However, the two are often spoken of together, and so the OPEB crisis deserves at least a brief treatment here. GASB Statements 43 and 45 did for OPEB accounting roughly what Statements 25 and 27 did for pensions, with three important differences. 

The first difference is that many fewer governments have established a fund for OPEB benefits at all. When GASB made its Statements 25 and 27, most pension systems were already funded on an actuarial basis. The statements had the effect of creating a welcome degree of uniformity, in addition to the less salutary effects described here. In 2004, however, when the OPEB statements were issued, few governments were pre-funding those expenses, so the effect of the new rules was to demand that such funds be created. The unfunded liability for all government-sponsored OPEB plans in the country is estimated to be over $2 trillion.51

The second difference between OPEB funding and pension funding is that typically there are no contributions to an OPEB fund by current employees. OPEB benefits are usually incurred as an expense by the employer alone, removing a significant contributor to the security of those funds. 

The third problem is the most significant, that the rate of health care inflation is—at present— greater than the rate of inflation for pretty much everything else.52 To make OPEB liability calculations, actuaries typically project the current rate of health care cost inflation forward 50 years or more. Projecting even a small percentage growth forward over half a century produces a tremendous sum, and the resulting liabilities are indeed enormous. 

However, the current rate of health care inflation is not sustainable over the next 50 years by any component of society, not just pension plans. It is not just city and county pension funds that will suffer if our nation fails to control these costs, the federal government, hospitals, non-profits, schools, corporations, and individuals will all be transformed in appalling ways by these escalating costs.52

Fifty years from now, if health-care inflation is not lowered significantly, all fifty states will have been bankrupted by Medicaid costs. The federal government will only have avoided a similar fate by printing enough money to devastate the value of Treasury bonds, causing worldwide financial instability. American corporations will pay more in health care to their employees than in salary. As the rest of the economy withers, health care costs will grow until they are much more than a quarter of GDP. 

The GASB accountants made a valid point about costs when they issued Statements 43 and 45. Indeed this nightmare scenario could happen. The issue is hardly the cost of funding these benefits. The issue is the escalating cost of health care for retirees and everyone else, retarded only slightly by the Affordable Care Act. The GASB rules in practice are akin to planning for an asteroid collision with earth by putting away enough money to pay the electric bill when it happens. The asteroid collision could happen, but the electric bill will hardly be anyone’s first concern. The irony is amusing, but if saving for the electric bill actually interferes with taking protective action for the rest of society, then it is actually destructive.