Massachusetts Faces $13.3 Billion in Unfunded Retiree Health Care Costs

Published November 1, 2008

The State of Massachusetts faces $13.3 billion in unfunded retiree health care costs over the next three decades—a cost of almost $444 million per year—according to figures released by a seven-member state government commission.

Problems Finding Funds

“The Government Accounting Standards Board (GASB) now requires public-sector employers to recognize future liabilities for their retirees’ health costs, like large, private-sector employers have had to do for decades,” said John R. Graham, director of health care policy at the Pacific Research Institute.

“Unfortunately but unsurprisingly, these liabilities are much larger than politicians and public-sector union bosses would have liked taxpayers to know,” Graham continued.

The commission, made up of four lawmakers, the state treasurer, the state’s senior budget advisor, and the chief of the state pension fund, found even an immediate start to state funding of the shortfall will be able to reduce the problem by little more than half.

The shortfall is compounded by a slowdown in the state’s revenue stream.

Tobacco Money Eyed

In its August report, the panel suggested the state government begin reallocating annual payments being made to the state by tobacco companies as a result of a 1998 settlement, recommending $70 million of the $290 million annual payments be dedicated to retiree health care next year, with that amount growing each of the next five years until it reaches $263 million—fully 90 percent of the annual tobacco fund payments—in 2014.

State budget analysts reacted to the suggestion by noting the tobacco settlement funds are already allocated for other state-funded health care obligations.

“I doubt that Massachusetts’s tobacco windfall was supposed to be used to pay these liabilities, but we’ve known for years that politicians use tobacco money to buy time and space for whatever problems they are unable to manage effectively today,” said Graham.

“To help protect taxpayers in the future,” Graham continued, “Massachusetts politicians should seriously consider fully replacing government employees’ current health benefits with consumer-directed plans, including health savings accounts, thereby giving public-sector workers and retirees incentives to spend health dollars more responsibly.”

Retirements Looming

The shortfall is “going to make the prioritization and choices even more difficult as we go forward, about what to keep and what to cut,” said Massachusetts state Sen. Steven C. Panagiotakos (D-Middlesex), a member of the commission, according to the Boston Globe.

“Younger people will oppose tax increases, and the demand for health care by the elderly will be acute,” said Canadian Member of Parliament Rob Anders (Conservative-Calgary), noting the similarities of Massachusetts’s health care problem with those in the Canadian system.

“In Canada, actuaries have predicted that the maximum draw on health care resources will be in 2017, only nine years away. The Baby Boom population will be approaching their high-water mark about then—something that will have an even more severe impact in the United States,” Anders said.

Problem Is Common

Virtually every state, county, and municipality in America is facing the same problem as Massachusetts, said Greg Scandlen, director of Consumers for Health Care Choices at The Heartland Institute.

“For the past two decades the politicians have promised unlimited benefits to public employees without a care about how it is to be paid for,” Scandlen said. “The politicians knew they would be out of office long before the bills came due, so there was no downside to them.

“No one has learned from experience,” Scandlen continued. “Even today the same thing is happening.

“Politicians buy off people by promising benefits that can never be fulfilled. The federal Medicare program, for instance, is facing $34 trillion in unfunded liabilities, and we keep adding more promises and more obligations,” Scandlen concluded.

Krystle Russin ([email protected]) writes from Texas.