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Sunday, June 18, 2017

A bill we can't pay

The State of North Carolina provides healthcare coverage for its retired employees. For decades, state governments have attracted workers by offering superb retirement benefits as an offset against below-market salaries prior to retirement. My father had this arrangement in Alabama. In the later years of his illnesses and my mother's, they spent less than $500 a year on deductibles, co-payments, and exclusions. Whatever Medicare didn't cover, the State did. Such a deal!

But North Carolina now projects it has a $42 billion unfunded liability for healthcare of current and future retirees who were promised these benefits. That's right, $11,000 of liability per every household in North Carolina… a breathtaking figure. By "unfunded" I mean that the State has no set-asides to cover the $42 billion. When the bills come due, there will be enormous pressure on the State's annual budget. If the State waits for that to happen, it will have only three options:

  • Repudiate, at least in part, its commitment to retirees and current employees.
  • Raise taxes.
  • Cut other programs and redirect their money.
All are politically difficult.

The fourth option is to reduce the unfunded liability now by dropping any retiree healthcare coverage to people who begin working for the State as of 2018. This option has no obvious pain, and therefore I predict that the General Assembly will adopt it. But it's not painless. It substantially reduces the attractiveness of working for the State, which operates in a free market for labor. Either salaries will have to be increased to compensate — putting pressure on the State's budget, again — or the quality of the State's workforce will fall. The latter is bad, too.

This problem is not limited to the public sector. I had worked for Nortel for 24 years when the company went bankrupt. Prior to bankruptcy I had expected both a pension and healthcare coverage during retirement. I will still get the pension because the federal Pension Benefit Guaranty Corporation has assumed the liabilities of Nortel's pension plan. (There are concerns that PBGC is itself underfunded.) However, PBGC does not guarantee the healthcare coverage that I would have enjoyed during retirement. This leaves me with "naked" Medicare unless I supplement it with a Plan D and a Medigap plan that I pay out of pocket for. I'll have to see whether my history of prostate cancer disqualifies me from such coverage (or makes it unaffordable) in whatever scheme President Trump and the Congress eventually replace Obamacare with.

Most private employers have already quit offering any benefits to future "retirees", whether pensions or healthcare. In such a company there is no practical difference between retiring and simply quitting. In lieu of retiree coverage, private sector employers offer a "defined contribution" plan such as a 401(k). Although I have taken advantage of 401(k)s to the extent I could, there are several problems with the concept:

  • Wall Street makes far more money from fees on millions of individual 401(k) accounts than on hundreds of professionally-managed investment funds. Don't be astonished that Wall Street loves the 401(k) concept.
  • Very few individuals have the discipline to save enough 401(k) money to cover their day-to-day retirement spending beyond Social Security plus their healthcare expenses beyond naked Medicare.
  • Many individuals are not knowledgeable enough about finance to manage a six-figure 401(k) or even to select who should.
In the South we say "This dog jus' don't hunt". If you're into laissez-faire, that doesn't worry you. But it worries me. I don't know how all this will play out in the next 30 years. The needs of the elderly for financial assistance will conflict with the needs of the young for current income. That's inter-generational political war.