One major theme of the State Budget Crisis Task Force Report is how attempts to stabilize federal finances may increase fiscal instability at the state level. Examples include cuts to K-12 and various grant programs (who knew that 47% of Mississippi's 2009 revenues came from the federal government?), and the elimination of the muni bond tax exemption. But the one cut mentioned in the report that could have the most direct impact on the problems discussed in this forum is raising the Medicare eligibility age from 65 to 67.
According to the Congressional Budget Office's most recent analysis, this would save $148 billion between 2012 and 2021. Support for raising the Medicare eligibility age is far from universal, but seems to have become stronger recently. The Affordable Care Act made some Democrats, such as President Obama, sympathetic to the idea, because the ACA's Medicaid expansion and state-run health insurance exchange networks were designed in part to facilitate health care access for older, uncovered Americans. (The Supreme Court's rejection of the ACA's Medicaid expansion would seem to complicate this debate, but that can be left aside for now).
Many retired public employees will never have to bother with health insurance exchanges or expanded Medicaid. State and local retirees who are old enough to draw a pension but too young for Medicare are often allowed to stay on their employer-sponsored plans. In the case of public safety workers, this could mean 15-20 years of transition period coverage. State and local governments often pay for all or some of the premium, too, but even when they provide no premium support, it's still a generous benefit to remain in the same insurance pool as younger and healthier active employees (in the trade, this is known as the "implicit subsidy").
Thus, raising the Medicare eligibility age, while a boon for the federal government, would mean that state and local governments would end up providing two more expensive years of transitional health coverage to their retirees.
True, some public pension systems have been raising their retirement ages. This would tend to reduce the length of the transition period between retirement and Medicare eligibility. But in most cases these pension reforms have been applied only to new employees, so the effect on reducing the transition period's length will be muted.
In any event, this underscores an important difference between pension and retiree health care (OPEB) liabilities, which is that OPEB's true long term costs are much more uncertain. In addition to being contingent on estimates about the cost of health care in the 2030s, OPEB liabilities depend on what the federal government will decide to do about Medicare.
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