Governing Magazine on Changes to Public Retirement and Benefits Plans

Amidst the blur of recent policy conversation about retirements and benefits — particularly in the public sector — add Gerard Miller‘s comments in Governing Magazine on the recent proposals for federal entitlement reform, and prescriptions for public pension and benefit systems.

A few states have begun to wake up. Illinois passed a bill this year that requires newly hired workers to work until age 67 to receive full benefits. That law does not include public safety or local government employees, but it sets a directional precedent that others should follow. Pennsylvania’s legislature last week raised the retirement age to somewhere between 57 and 65 for new hires under a convoluted “rule of 92” formula but backpedaled on the actuarial contributions, so they really just kicked the can on financial discipline despite claims of “reform.”

More states will need to align their pension benefits with Social Security, whether or not the federal age limits are increased. Many more state and local governments will need to do the same with their retiree medical benefits (known as OPEB, for “other post-employment benefits”).

Miller goes on to talk more about health benefits:

Next, we need to re-evaluate retiree medical benefits, and their perverse impact on retirement age. It makes no sense financially to continue the current practices of many states and localities that provide full health insurance benefits to employees who retire before they receive Medicare. In the first and obvious place, few governments can realistically afford to pay this much in the first place. So let’s stop promising what we can’t afford. Second, there is no competing private-sector benefit richer than this, so this is not an issue of “attracting and retaining” talented workers. Third, the option to retire early with full medical benefits encourages early retirements — which impairs the pension fund as well. So it’s triply stupid from a public-policy standpoint.

Again, some state laws will require that such changes can only begin with new employees. In other states, however, the employers can change the rules for current workers (preferably beginning with the youngest and lowest-tenured). For incumbents whose benefits cannot be changed, the smarter approach may be to charge the employees for half of the full actuarial cost of retiree medical benefits before age 65, and see if they still want the early retirement benefit. When employees are presented with the full cost of their retiree medical benefits, many will decide to scale back to something more affordable. So, the incumbents’ choice could be to either (a) pay half the actuarial cost of early-retirement medical benefits, or (b) pay nothing for a Medicare supplement that begins at age 65. This structure will quickly encourage public employees to work longer, approaching age 65, even if their pension benefits are legally available to them at earlier ages.

Girard Miller the Public Money columnist for GOVERNING and a senior strategist at the PFM Group. He has 30 years of experience in public finance and investments as a former GASB board member, and Janus mutual funds and ICMA Retirement Corp president. He also authored 12 publications in the field, including “Investing Public Funds.”

Michael Sanderson

Executive Director Maryland Association of Counties

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