- The Washington Times - Sunday, July 29, 2007

If one of the “Big Three” U.S. automakers — General Motors, Ford and Chrysler — declares bankruptcy in the future, a major contributing factor will be the spiraling costs of health benefits for their retired workers. The “Big Three” aren’t the only major institutions facing dire financial problems directly attributed to the health costs of their retired workers. Virtually every state in the nation and countless cities across America confront the same problems after having granted public employees early-retirement deals replete with taxpayer-funded health benefits.

Blue-collar auto workers often need to retire after 30 years of physical labor because their bodies can no longer take the daily wear and tear of the assembly line. But state and local governments have no such excuse for burdening their taxpayers with breathtaking health-care costs by permitting their largely pencil-pushing, keyboard-striking bureaucrats to retire 10 to 15 years before they become eligible for Medicare at the age of 65. Moreover, in recent decades, the private sector has relentlessly replaced company-paid defined-benefit pension plans with 401(k) retirement plans that require employees to finance their own pensions through defined contributions. During that period, the taxpayer-financed public sector has achieved a near monopoly on gold-plated, early-retirement pension plans, which are buttressed by extravagant, taxpayer-funded health benefits for 10 years and longer. And most taxpayers do not have a clue what they will be facing in the near future.

In an eye-popping analysis of the financial crisis barreling down upon New Jersey’s taxpayers, the New York Times last week reported that the state has accumulated a health-care-related unfunded liability of $58 billion. That’s the amount of money, in today’s dollars, that is needed to pay for the health costs of its public employees after they retire. Noting that the state’s $58 billion retiree-health-care millstone is nearly double New Jersey’s annual budget and its outstanding debt, the Times further reports that New Jersey local governments have incurred another $10 billion in largely unfunded health costs for their own retired public workers. Meanwhile, the state’s pension fund is so underfinanced that it would need annual infusions of $2.2 billion just to bring it back to balance. Despite making pension-fund contributions that are larger than the combined averages of the previous four administrations, Democratic Gov. Jon Corzine is still able to provide only half of what is needed for pensions.

Regarding the health-benefits crisis, for now it is pay-as-you-go. New Jersey’s state government will spend about $1.1 billion on the health costs of its retired public employee this year; and that amount will double within five years. To get a handle on health benefits for retirees, a former New Jersey treasurer estimates that the state would have to begin today setting aside $6 billion per year. With pensions so unfunded, however, not a dime is available to resume financing a health trust fund. We say “resume” because from 1987 through 1994 New Jersey was one of only a few states that had the fiduciary foresight to set aside money for retiree health costs. But newly elected Republican Gov. Christine Todd Whitman decided in 1994 to end that practice. Instead, the money that had been going into a health trust fund was used to finance the tax cut she promised to win election.

No longer setting aside any money for retiree health care, New Jersey effectively pretended those future obligations did not exist. That mindset encouraged politicians to improve retiree health benefits. New Jersey public workers can generally retire at 55. New Jersey taxpayers fund the entire health-care premium for retired public workers. Those with 25 years of service — and sometimes their spouses — enjoy lavish health benefits (such as co-payments of $5 when exercising their right to see any doctor they want whenever they want and generous caps for out-of-pocket expenses) until they qualify for Medicare, at which time New Jersey funds supplementary health benefits.

Needless to say, New Jersey isn’t the only state facing huge health-care liabilities for its retired public workers. Excluding New York City public workers, New York State faces $47 billion in retiree health costs. Excluding teachers, whose health benefits in retirement are publicly funded elsewhere, California confronts $48 billion in public-employee retirement health costs. North Carolina, Connecticut and Alabama face costs of $24 billion, $21 billion and $20 billion, respectively, according to the Times. These health costs are above and beyond underfunded public pension systems. Taxpayers, relatively few of whom will enjoy comparable early-retirement opportunities and post-retirement health benefits, will be picking up the tab. It is long past time that taxpayers become aware of the public-employee retirement obligations that politicians from both parties have been complicit in thrusting upon them.