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The Boston Herald


Unhealthy State of Retiree Costs

January 15, 2013

By Stephen Eide

Nationwide, state and local governments have found themselves in the odd position recently of having to reduce their workforces in order to pay for the health benefits of retired employees. Though the state and local fiscal outlook has improved somewhat, growth in retiree health care costs is still unsustainably outpacing growth in revenues.

In Massachusetts, Gov. Deval Patrick and the Legislature have acknowledged the problem, and a special Retiree Health Care Commission has laid out a framework for reform. But the framework is flawed. The special commission’s report fails to address a fundamental tension in the ongoing debate about public employee retirement benefits: What is the purpose of offering pension and health benefits to retired public workers? Is it to provide retirement security to low-income workers, or to attract and retain a qualified workforce? If the former, benefits should be protected and perhaps even expanded; if the latter, they should be scaled back drastically, in accord with recent trends in the private sector.

The special commission hedged and endorsed both purposes. The result is a watered-down reform program that makes further rounds of reform all but inevitable. True reform will remain elusive until governments reject the notion that they should operate, through their public retirement systems, sidecar welfare states for retired public employees.

Much like defined benefit pensions, lifetime health benefits remain common in the public sector, but have been largely phased out in the private sector. Less than 10 percent of private sector employers in Massachusetts now provide retiree health care (often referred to as other post-employment benefits, or "OPEB").

Massachusetts state and local governments’ total unfunded OPEB liability is over $45 billion. Costs are growing rapidly due to baby boom retirements and high rates of medical inflation. The burden falls almost entirely to current taxpayers, because few governments have set any funds aside. Retirement benefits are a form of deferred compensation, so current generations are being forced to compensate retirees for services provided to past generations.

It’s an unfair and irresponsible system, but reformers may take heart. Legal protections for OPEB are not as ironclad as those for pensions. Current employees’ benefits can be reduced, and they should be, far beyond what the special commission recommends, in order to prevent costs from further overwhelming state and local budgets. And governments should at least consider phasing benefits out completely for future employees.

But unions, union-friendly legislators, and even many public administrators continue to resist aggressive OPEB reform because, for them, ensuring retirement security for public employees is a vital responsibility of state and local government. Unions view pensions and retiree health care as entitlements, part of a social safety net for their members.

There are at least two problems with this position. First, unchecked retirement-benefit costs threaten social welfare programs that benefit the truly needy, such as those without jobs. Gina Raimondo, Rhode Island’s Democratic state treasurer, made this claim central to her bold and successful 2011 pension reform campaign. As she explained to The Wall Street Journal, "I would talk to social workers or social-service agencies who, when I started to talk about pensions, would ask, ’Why should I care about pensions?’ And I said, ’Because if you don’t, your whatever it is, homeless shelter, is going to lose X thousands of dollars of funding.’"

Second, while it’s one thing to protect the benefits of retirees and their dependents, unions advance the pensions-and-OPEB-as-social-welfare argument to support benefits for current employees who will not retire for decades and even for employees who have not yet been hired. Is it so unreasonable to expect a worker who enjoys decades of government employment to be able to prepare and provide for retirement? Can it possibly be true that these employees can’t manage this responsibility without additional government support, as most private sector retirees do?

Reform advocates often lament public ignorance of the depth of the pension and OPEB crises. But it’s equally lamentable that these issues are distracting public officials from the real work of state and local government, such as how to finance infrastructure, improve schools, and keep communities safe and prosperous. Pensions and OPEB consume resources and political capacity far beyond their value to the public. This will continue so long as watered-down reform remains the norm.

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