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The OPEB Off-Ramp: How to Phase Out State and Local Governments' Retiree Health Care Costs

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The OPEB Off-Ramp: How to Phase Out State and Local Governments' Retiree Health Care Costs

March 31, 2016
Urban PolicyPublic Sector ReformTax & Budget
Public SectorOther

Abstract

Public awareness of U.S. states’ and cities’ retirement cost burden has increased in recent years; but contrary to popular perception, the problem is not limited to pensions. The long-term bill for retiree health care (other post-employment benefits, or OPEB) has been estimated at over a trillion dollars.

Key Findings

  • The persistence of retiree health care in state and local governments is partly a consequence of the influence of government unions: states with unionization rates above that of the national average (28.5 percent) have nearly three times larger per-capita OPEB liabilities.
  • Union strength is a problem but not entirely to blame for large OPEB obligations—many southern states with weak labor unions have high OPEB liabilities.
  • Governments have too much OPEB debt because of policymakers’ willingness to promise benefits in the future to satisfy interest groups in the present; this problem is combined with the standard, and misguided, public-sector preference for backloading compensation into retirement, as well as an inability or unwillingness to cut costs.

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