Policy Seminar on Unfunded Retiree Healthcare: The Elephant in the Room

Thursday, March 5, 2015
George Shultz Conference Room, Herbert Hoover Memorial Building

PARTICIPANTS
Bob Pozen, David Brady, John Cogan, Darrell Duffie, Doug Irwin, Tim Kane, David Mauler, Josh Rauh, Pierre Siklos, Tom Stephenson, John Taylor

ISSUES DISCUSSED
Bob Pozen, Senior Lecturer at Harvard Business School and Senior Fellow at the Brookings Institution, discussed his work on “Unfunded Retiree Healthcare: The Elephant in the Room.”

Pozen began by noting that public sector healthcare retirement benefits have remained somewhat under the radar in comparison to pension benefits. However, retiree healthcare poses an equally important issue facing state and local governments. Government premium subsidies to retirees comprise most of OPEBs (Other Post-Employment Benefits), a significant financial burden on state and local budgets. Under GASB, OPEBs are not included as liabilities on governments’ balance sheets, and requirements rarely exist for advanced funding. This lack of political accountability has given rise to ballooning amounts of unfunded OPEBs. Pozen reviewed data on a number of state and city governments, illustrating the alarming scope of unfunded OPEBs.

Pozen continued by outlining the following proposals for regulators: a standardization of discount rates used to calculate OPEB liabilities, an inclusion of OPEB liabilities on balance sheets, and a standardization of the use of amortization when funding OPEBs.

Concluding, Pozen mentioned the encouraging outcome of recent court decisions ruling in favor of governments being able to restructure OPEBs (unlike stronger legal protection afforded pension obligations). The Affordable Care Act has made this more palatable for courts and consequently allows state and local governments to shift obligations to the federal level. Pozen also noted that the threat of downgrades from rating agencies provides an impetus for appropriate discussion addressing this looming problem. 

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