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End unfunded retiree benefits

By Jennie L. Phipps · Bankrate.com
Tuesday, July 9, 2013
Posted: 4 pm ET

I live right outside of Detroit -- I can see the two General Motors towers from my backyard. I've been particularly interested in the efforts to avoid city bankruptcy, a proceeding that would be a disaster for the core of this region and its communities.

The city is weighed down by almost $20 billion in debt. Of that, $5.7 billion is a liability to pay for retirement health care, according to an analysis by Stephen Eide, a senior fellow at the Manhattan Institute's Center for State and Local Leadership, writing for Bloomberg.

Retiree health care plans have nearly disappeared from the private industry, but they are still common among public and some union employees. In Detroit -- and other cities as well -- programs that encourage early retirement allow workers to stay on the city's health care insurance plan until they are old enough for Medicare -- a benefit that Eide figures is worth as much as $20,000 a year per early retiree. After that, the city pays for "Medigap" supplemental insurance for the rest of former employees' and their spouses' lives.

It is an incredibly generous and open-ended retirement planning benefit. In Detroit, while the city expects to pay pensions from an investment account that is 60 percent funded -- 20 percentage points below what actuaries consider adequate -- retiree health care is totally unfunded and is being treated as an operating expense, paid directly from tax revenues.

Detroit isn't the only entity with this problem. Eide says California municipalities owe $120 billion in unfunded retiree health care, a figure that is rising as more boomers retire.

Eide points out that while trimming pensions is legally very difficult in most communities, retiree health benefits aren't as protected and they can be cut or eliminated. In the case of Detroit, which is close to bankruptcy, ending retiree health care benefits and requiring former public employees to pay for Medigap policies or private insurance through the Affordable Care Act is a small sacrifice for a greater good.

Anyone who lives in a community that struggles to pay current employees for basic services like police and fire should take a look at its retiree health care obligations. If, like Detroit's, these benefits are open-ended and unfunded, now is a good time to lobby for their elimination.

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2 Comments
SUNRISE
July 11, 2013 at 12:33 pm

Pension systems need to pay the benefits that were agreed too. The employees were under the understanding that they would receive these benefits, and refused other opportunities for more income or benefits due to what was promised to them. I do not understand why the Public Sector things that they can refuse to pay these benefits. They are obligated to pay!! Maybe they should be better at budgeting their money elsewhere like building new buildings, roads, bridges, or having the latest greatest car, phone, or computer. This makes me so angry!

artist
July 09, 2013 at 9:56 pm

FDR was opposed to public employee unions. IOW, he did not think unions were appropriate for government workers.