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This New York Times article details how thousands of government entities face mountains of unfunded liabilities due to their promising free (or nearly free) health care to millions of workers upon retirement. Governments simply do not have the resources to make good on these promises. I suspect that many people are inclined to blame rising health care costs rather than the underlying instability of pay-as-you-go schemes. I will not address this question here. Rather, I am interested in the reactions to the problem as reported by the Times.

Clearly, to pay for this problem one or more of the following must occur: taxes will increase; retirees must wait to receive benefits; current workers must receive lower pay (via higher contributions); or current retirees must lose out on promised benefits. In addition, the structure of current employment contracts must change since I foresee neither dramatic increases in population without a newfound willingness to open our borders nor reductions in the cost of (or the demand for) health care in the coming years.

Four quotes in the story stand out for me. The first is from a union activist and single mother in Alaska:

“They keep chiseling away at employees’ pay and benefits (and so would make it harder to recruit qualified teachers and government workers).”

First of all, who is “they”? Second, if teachers and government workers will not be attracted by lower wages and benefits, then agencies will have to raise wage offers to attract workers. If they were able to attract workers at lower wages and benefits before this crisis, one must wonder why pay and benefits were not cut sooner.

The second comes from a deputy research director of the American Federation of Teachers in response to a deal struck by the UAW with GM and Ford to reduce future retirement health benefits for current workers:

“We expect the same thing in the public sector (persuading workers to accept lower retiree benefits), unless we help employers do the right thing.”

What exactly does this person mean by doing the right thing? Ironically, this to me sounds like an appeal to moral absolutism. Is there even such a thing a “the right thing”? If so, who decides what it is? Is it the same for all of us? Does it matter if the “right thing” cannot be afforded? Are costs not as real in the public sector as they are in the private sector? Apparently not. The AFT commentator and many of us simply ignore the fact that if each of us cannot afford to do something individually, then there is no way that we can afford it collectively. Hence my third favorite quote. The Times story summarizes the sentiments of the public employees unions as,

“If governments are forced to disclose the cost of their plans, they would probably cut or drop them, just as companies have done.”

Are they suggesting that if governments simply continued to mislead the public about the pension schemes that the schemes would suddenly become affordable? I choose to not believe that reasonable people believe this. It appears to me that unionized government workers (UGW) feel they are entitled to free health care throughout retirement and don’t care about the millions of even less-fortunate workers who are not represented in this article that lose out because of such schemes. As GASB has required states and cities to calculate the value of their obligations to retirees, the states and cities are moving to keep future liabilities in check by changing their policies. Many will require that teachers retiring after 20 years of service would have to pay 40% of their insurance premiums as well as co-payments and deductibles upon retirement. This would seem to be a great deal to E.C. Harwood’s Saturnians (see “Useful Economics”) but not for the UGWs. In an age of unprecedented health (life expectancy is now approximately 80 years) and availability of medical procedures, I find it incomprehensible that there is moral outrage at being forced to pay for 40% of your own medical expenses after working for less than a third of your adult life.

But the kicker of the article comes as the Times informed the Mayor of Duluth that some states and municipalities have been building health care trust funds for its retirees for years (e.g. Ohio has $12 billion set aside and is able to pay its current retirees’ health costs out of investment returns alone). You see, Duluth never set a nickel aside for retirement health benefits. With admirable candor, the mayor tells the readers why this has happened,

if you set money aside, you’d do less ‘pretty projects.’ Less bricks and mortar. Fewer streets. Fewer parks. So no one set the money aside. If the city has set $1 million aside every year for those 22 years (since the promise was made) we’d be in really good shape right now.”

Wow. If ifs and buts were candy and nuts …

Since pension obligations have been off balance sheet liabilities, it was not easy for citizens to see the problem. When Enron made some despicable off-balance sheet transactions, the company went out of business and people went to jail. When Duluth behaves with the fiscal responsibility of an infant tree sloth, there are no repercussions. The city’s behavior is the equivalent of me buying my soon to be arriving child lots of pretty stuffed animals and a state of the art music box, but “forgetting” to buy it the food, clothes and shelter I (implicitly) promised it when it was conceived.

In any case, I believe that all retirees that have been promised benefits and entered into contractual agreements freely and peacefully are entitled to receive what was promised them. How will these obligations be met? By all of us taxpayers of course. Actuaries claim that there are some 5.5 million retired public employees who are eligible to receive these benefits. I have seen calculations that suggest that these workers’ medical expenses would cost on average of $200,000 per retiree over the course of their remaining lifetimes. This bailout would amount to a bill of $3,500 to every man, woman and child currently living in the United States – or well over $5,000 for every taxpayer. Part of me welcomes this event. Only when we are all forced to pay trillions of dollars in bailout money will the financial alchemy of pay-as-you-go systems be revealed. Only then may people begin to appreciate that even seemingly benign and well intentioned government interventions into our economic lives will ultimately result in the strangulation of our freedoms and further erode the ethic of individual responsibility which is the fuel that keeps a community’s fire burning.

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