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Few Public-Sector Employers Pre-Fund Retiree Health Plans

March 3, 2008
Few state and local governments are pre-funding their retiree health care plans, which could have liabilities as high as $1.6 trillion, the Government Accountability Office reports.

In its report, the GAO said that based on its discussions with public-sector executives, there are several reasons why few public-sector employers pre-fund retiree health care benefits.

One reason, the GAO was told, is that many of the plans were established at the time when health care costs were low, so paying the benefits as a yearly expense was not considered burdensome.

Additionally, since there are fewer restrictions in cutting retiree health care benefits—compared with pension plans—employers are reluctant to commit funds to a benefit that may be reduced or eliminated in the future, the GAO was told.

Currently, on average, retiree health care benefits costs are equal to about 2 percent of what public employers pay for employees’ salaries. By 2050, that expense will be affected by a growing pool of retirees and health care inflation and is expected, on average, to equal about 5 percent of salary, “adding to budgetary stress,” the GAO said.

That will mean public employers “may face even greater pressure to reduce benefits or shift the costs of benefits to beneficiaries,” the GAO said.

Indeed, in the private sector, the percentage of employers offering retiree health care has plummeted in the last decade, while in the auto industry—one of the last bastions of rich retiree health care coverage—the Big Three Detroit automakers reached agreements last year with the United Auto Workers to walk away from those commitments in exchange for tens of billions of dollars in contributions to special health care trusts that the UAW will control.

Filed by Jerry Geisel of Business Insurance, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.