December 15, 2005

Public Retirement Systems: Another ‘Small’ Peek, and a Growing Recognition of the Huge Problem

Filed under: Economy,Taxes & Government — Tom @ 1:12 pm

The New York Times on December 11 had a very good article (in terms of information, but not for solutions) about the coming public pension and retiree healthcare crises (HT Porkopolis, who also has a related post).

It starts by looking at Duluth, Minnesota:

SINCE 1983, the city of Duluth, Minn., has been promising free lifetime health care to all of its retired workers, their spouses and their children up to age 26. No one really knew how much it would cost. Three years ago, the city decided to find out.

It took an actuary about three months to identify all the past and current city workers who qualified for the benefits. She tallied their data by age, sex, previous insurance claims and other factors. Then she estimated how much it would cost to provide free lifetime care to such a group.

The total came to about $178 million, or more than double the city’s operating budget. And the bill was growing.

“Then we knew we were looking down the barrel of a pretty high-caliber weapon,” said Gary Meier, Duluth’s human resources manager, who attended the meeting where the actuary presented her findings.

Mayor Herb Bergson was more direct. “We can’t pay for it,” he said in a recent interview. “The city isn’t going to function because it’s just going to be in the health care business.”

Duluth’s doleful discovery is about to be repeated across the country. Thousands of government bodies, including states, cities, towns, school districts and water authorities, are in for the same kind of shock in the next year or so. For years, governments have been promising generous medical benefits to millions of schoolteachers, firefighters and other employees when they retire, yet experts say that virtually none of these governments have kept track of the mounting price tag. The usual practice is to budget for health care a year at a time, and to leave the rest for the future.

Off the government balance sheets – out of sight and out of mind – those obligations have been ballooning as health care costs have spiraled and as the baby-boom generation has approached retirement. And now the accounting rulemaker for the public sector, the Governmental Accounting Standards Board, says it is time for every government to do what Duluth has done: to come to grips with the total value of its promises, and to report it to their taxpayers and bondholders.

The idea that states, cities and counties could make these promises without having an idea of their ultimate cost is a disgrace.

Since we can’t pull the people who made those decisions out of their coffins and nursing homes and flog them, what can be done? Well, for starters, new rules are going into place that will force the recognition of the problem:

The new accounting rule is to be phased in over three years, with all 50 states and hundreds of large cities and counties required to comply first. Those governments are beginning to do the necessary research to determine the current costs and the future obligations of their longstanding promises to help pay for retirees’ health care. Local health plans vary widely and have to be analyzed one by one. No one is sure what the total will be, only that it will be big.

Stephen T. McElhaney, an actuary and principal at Mercer Human Resources, a benefits consulting firm that advises states and local governments, estimated that the national total could be $1 trillion. “This is a huge liability,” said Jan Lazar, an independent benefits consultant in Lansing, Mich. “If anybody understands it, they’ll freak out.”

Recognition of the problem is a step, but beyond that, The Times offers us only a tug of war between taxpayers and public-sector unions.

There is a better idea: private accounts. That isn’t to say there isn’t going to be pain. The people we can’t flog caused that. But private accounts at least have a light at the end of the tunnel after a couple of generations of implementation wash the current liabilities away. Sticking with or just tweaking the current system is guaranteed to lead to state and municipal insolvency on a grand scale.

Previous Post:
August 9: Public Retirement Systems: A “Small” Peek at a Huge Problem (Cincinnati)


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