President Obama and Speaker Boehner are reportedly close to a fiscal cliff resolution. One of the last sticking points is whether the Medicare eligibility age should be increased from 65 to 67.
This would have major implications for state and local governments. State and local governments are now faced with a $1 trillion+ unfunded retiree health care (OPEB) liability primarily because they provide health insurance to retired employees during the gap years between retirement and Medicare eligibility. Some governments also provide Medigap supplemental insurance, but not as many (see Exhibit 11.4), and, in any event, this insurance is less expensive because Medicare is the primary payer.
Many state and local governments have recently raised their normal pension retirement ages. This will do something to narrow the gap between retirement and Medicare-eligibility. But extending Medicare eligibility means not only two more years of coverage, but two more expensive years of coverage. If retirement is postponed by two years at the same time that retiree health benefits are extended by two years, this would still be a net loss, because insuring a 66 year old is more expensive than insuring a 62 year old. Also, all things being equal, there's no real fiscal difference between insuring an actively employed 62 year old or a retired 62 year old.
Pegging Medicare eligibility at 67 would increase OPEB liabilities, meaning higher costs for governments, taxpayers, and also active employees. Since employees generally pay a share of their premium, keeping retirees in the same pool as actives leads to higher premium costs for employer and employee.
Not that it shouldn't be done. The Congressional Budget Office estimates that increasing Medicare eligibility by two months every year starting in 2014 (at which rate 67 would be reached in 2027) would reduce Medicare outlays by $150 billion from 2012-2021.
The fact that state and local governments are exposed in this way is that much more reason why they should be rethinking their OPEB commitments, not that the federal government should shy away from Medicare reform.