The Employee Benefit Research Institute has just put out a strong report that's sure to captivate anyone interested in the retiree healthcare (OPEB) problem (you know who you are, hypocrite lecteur).
But before the highlights, a quibble. Employer-sponsored retiree healthcare has been in steep decline for a few decades. Like many other reports about OPEB, EBRI cites changes in accounting standards as the main cause of this decline.
In the early 90s, private corporations had to start disclosing their longterm OPEB liabilities (FASB 106) and in the mid 2000s, state and local governments did (GASB 43 and 45). Employers were shocked, shocked at how much they had promised, and began to scale back benefits, especially in the private sector.
But let's step back. These trends are better understood in connection with what Yale's Jacob Hacker calls "The Great Risk Shift." Much of the pension and healthcare liability formerly borne by employers has been shifted to individuals. Firms saw the drag that these liabilities exerted on the airline, auto and steel industries. Perhaps they also became less presumptuous about their chances at uninterrupted profitability. As a result, many old firms that used to provide defined benefit pensions and retiree healthcare don't anymore, and new firms decided not to offer them in the first place.
It wasn't accounting standards that sent these benefits into decline. It was a revolution in corporate philosophy.
To turn, then, to two highlights from the EBRI report:
One, those of us eager to find ways to persuade local governments to get out of the OPEB business might have cause to celebrate Obamacare. According to corporate surveys cited by EBRI, many firms who still offer OPEB view the new state-sponsored exchanges as a way to exit their commitments.
If the exchanges work as well as advertised, this shift may be inevitable. But let's be cautious about recommending it as a serious policy solution to state and local governments' OPEB problem. The exchanges' plans come with significant public subsidies. The subsidies provide assistance to anyone with an income up to 400% of the federal poverty level, meaning over $90,000 for a family of four. A vast influx of state and local retirees onto the exchanges could result simply in shifting costs from state and local governments to the federal government. (Of course, given that the exchanges' subsidies are means-tested, 1%er state and local retirees who enjoy substantial pensions may not even qualify for a subsidy, or not a very costly one.)
It will be interesting to see how government employers respond to the exchanges. Will they exercise this option? If they don't, will this be because of a stiff upper-lipped resolve not to encumber the federal government with their problems, or an unwillingness to offend unions and retirees?
Two, though employer-sponsored OPEB has of late become slightly less prevalent in the public sector, not only has the decline been less dramatic than in the private sector, the trend hasn't even been linear. During the late 90s dotcom years, states actually increased their OPEB commitments (Figure 4).
One cannot help here but be reminded of the unsustainable pension increases that the dotcom bubble tempted governments into enacting.
In a time of relentless poormouthing by state and local governments about inadequate revenues, sequestration cuts, etc., it is interesting to recall that good economic conditions cause problems, too. In either case, it's a question of management: how to adjust operations when revenues collapse, and how to hold the line on spending when you have more revenue than you know what to do with.