The focus on retiree pensions has eclipsed an equally important target for reform in Detroit and other cash-strapped American cities: retiree health care benefits.
In their attempts to turn the Detroit bankruptcy into a teachable moment, many commentators have focused on pensions, and rightly so. Detroit’s billions in pension debt are a driving cause of its insolvency and inability to provide basic services. Should he succeed in his plan to cut pensions in bankruptcy, Emergency Manager Kevyn Orr would set a powerful precedent for other cities in a similar position.
But the focus on pensions has eclipsed a more promising target for reform: the health care benefits promised to retirees. Retired public employees often qualify for free or low-cost health insurance, a benefit increasingly rare in the private sector. These benefits are available for life as early as age 50 and sometimes cover even the co-payments which Medicare recipients must pay.
Detroit’s retiree health care liability is not only estimated to be larger than its pension liability, it will also be much easier to address, because the legal protections are weaker. In the near term, states and cities should take a lesson from Detroit’s struggles and focus on cutting retiree health care, a more achievable goal than pension reform, and also one with the potential to yield immense savings.
State and local governments provide retiree health care in a variety of forms. Pre-Medicare “early” retirees are often allowed to remain on their workplace health plan, allowing them to pool their risks with younger, healthier employees. This benefit alone (known as the “implicit rate subsidy”) can be worth thousands of dollars in savings each year. Governments then may also pick up some or all of early retirees’ premium costs. When a retiree reaches 65, much of the burden shifts to Medicare, but many governments continue to offer assistance managing the out-of-pocket and premium costs associated with Parts A, B, and D. Finally, there are dependents’ and survivors’ benefits, and vision and dental insurance.