California's struggling to pay for health care for retired state employees, with an estimated $72 billion in medical costs coming in the next 30 years. Gov. Jerry Brown's solution: Make workers start contributing money to pay for the health care they'll need after retiring.
Three years ago Brown pushed through a pension system reform to increase the amount public workers must contribute to their pensions, but that effort left health costs for retirees untouched. And while pensions are certainly in trouble, retiree health care is potentially a much bigger deal. Health-care inflation rises faster than pension inflation, and unlike with pensions, employers are not required to prefund health benefits. (The U.S. Postal Service is a notable exception, and don't think they don't complain about it.)
Until recently, the courts had regularly said that health- care benefits must be honored. In January, that changed: The Supreme Court unanimously decided that retiree health benefits are not necessarily guaranteed. Retirees who once worked for M&G Polymers USA sued because they were suddenly required to contribute to their health-care costs. Free health care for life wasn't explicitly promised in their contract, but the retirees claimed that health benefits, like vested pensions, can't be taken away. The court disagreed.
Few companies still offer health care to their retired employees. The Employee Research Benefit Institute estimates that in 1997, some 29% of private-sector employees worked somewhere that provided health insurance after retirement. In 2010, fewer than 18% did. Most retirees qualify for and take Medicare, with employer coverage to supplement it. But for some 2 million retirees who are not old enough to qualify for Medicare, employer health plans are their only insurance.
The ruling came at an interesting time. Since 1992, private companies have had to list health-care obligations as a liability on their balance sheets. Being forced to disclose health-care costs led many employers to ditch retiree health care. A Kaiser Foundation report speculates that the remaining plans may soon be eliminated, too. The existence of Medicare Part D (which offers prescription drug benefits) and the Affordable Care Act (which offers a nonemployer-based insurance option for retirees under 65) makes it easier for employers to eliminate retiree health care, because retirees have viable alternatives. The only thing standing in their way was the obligation to honor existing benefits. The court's decision made getting out of those obligations much easier.
The Supreme Court's ruling may finally signal the end of private-sector retirement health benefits. What it means for public-sector retirees is still an open question, although some lawyers say the same ruling will apply. If that's the case, the consequences may be more far-reaching. Employer health coverage among public-sector retirees is still common. From 2006 to 2010, health plans covered two-thirds of Medicare eligible and three- quarters of early retirees. The Pew Foundation estimates that retiree health benefits leave states on the hook for $627 billion. Pew says only seven states have enough saved to pay at least 25% of their retiree health obligations. Seventeen states have no money saved at all.
As of last year, states and municipalities face more stringent requirements on disclosing their retiree health-care obligations. More transparency, new alternatives, and rising costs give governments a huge incentive to ditch their retiree health plans too. But whether they can is uncertain. Last summer the Illinois Supreme Court ruled that retiree health benefits are guaranteed the same way pensions are. Rogers expects the latest ruling to affect some states more than others, as it will apply only to benefits negotiated with a union. But at the very least, people may start seeing health benefits differently.
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