By Tom Sgouros in Rhode Island’s Future
I
read in last Monday’s newspaper about
the terrible state of the retiree health-care system in our cities and towns.
The trust funds that are supposed to pay for retiree health benefits (called
“Other Post-Employment Benefits” or OPEB) decades into the future are deeply in
the red.
But
as usual, there are some very troubling assumptions made in order to paint this
bleak picture. If you do the math, you’ll see that the actuaries who predict
this disaster do so by assuming a catastrophe.
Where
does this terrible debt come from? It comes from the exploding cost of
health care, extended out a few decades into the future. Even a small inflation
rate, sustained over 50 years, can become a huge number. So what have the
actuaries assumed in order to make these bleak predictions?
I surveyed some of the reports, and found that Providence’s actuaries assumed that 2011 would see 7.5% inflation, scaling down to 4.5% in 2022 and for all the years thereafter. From my casual survey, this seemed typical, even low, and it sounds reasonable, right?
East Providence’s actuaries assumed 9%,
sloping down, Barrington’s 8% and so on. Health care inflation has been at
8-10% for far too long, so a declining rate of inflation actually seems
optimistic, doesn’t it?
But
let’s do more math, because there’s an interesting story lurking in it. There
are lots of city and town employees who will still be getting this health care
benefit 50 years from now. (And state employees too. The report on Monday was
about municipal benefits, but the state system has the same problem.)
So
what will happen 50 years from now? According to these projections, in
the year 2061 health care costs will be around 12 times what they were in 2011.
A procedure that costs $1,000 in 2011 will cost $12,000. If we make a similar
projection with ordinary inflation, 50 years out we’re looking at around a
factor of three, as in the graph above. So the actuaries are predicting that
your income, food, gas, whatever, will be up by a factor of three, but health
care more than four times as much.
That
is a truly remarkable number, and should be scary for anyone who is promising
these benefits to their employees today. One way to look at the problem is to
panic that our cities, towns, and state have not put away nearly enough money
to pay for these benefits down the road.
This
is the point of the OPEB benefits report, and the unquestioning articles that
fan the panic over these costs. This panic has serious results, including tax
increases, cuts to other important services, and the potential for still more
municipal bankruptcies.
Providence
is said to owe over $1.1 billion, Pawtucket $300 million and Warwick over $230
million. Collectively the debt is over $3 billion, more than the cities and
towns owe for their pensions. Indeed, that was the screaming headline of the
email I received from the “RI Taxpayers” group on Tuesday morning.
The
other way to look at the problem is that it’s a complete crock. I cannot
predict the future, so I don’t know how exactly it will happen, but I am quite
confident that 50 years from now health care costs will not be 12 times what
they are today. More importantly, if costs are as high as that, the matter of
how to pay them for people who have retired will be the least of our worries.
Let’s
do a little more of the math. These days health care costs run a little more
than half of average housing costs. Do you believe in a world where health care
costs more than twice what you pay for your mortgage? That’s what these
projections predict.
Health
care costs today — for employees, prisoners, poor people, DCYF clients, and so
on — represent about $2 billion, around a quarter of the state budget. By these
projections, in 50 years they will be well over half the budget.
What
few private corporations who still offer health insurance will be paying equal
amounts in salary and health benefits. Looking at the share of GDP that goes to
health care, our nation will be paying well over 20% for health care,
approximately twice as much as any other developed country today.
These
are not sustainable increases. I do not have to know how or when these
increases will be reined in, but only observe that they are not feasible to
know that they will be reined in somehow. Herb Stein, economic advisor to
Richard Nixon, put it this way, “Things that can’t go on forever, don’t.”
In
other words, these OPEB projections are complete malarkey, compiled by
actuaries whose noses are so deep in their spreadsheets that they can’t seem to
see they are predicting the end of civilization as we know it and wondering how
to pay for retiree health benefits when it happens.
Put
it in perspective. As I said, the state’s budget contains around $2 billion in
health care costs. The cost for retiree health care? Around $50 million. I
sometimes while away idle moments wondering about what would happen if an
asteroid hit the earth, but my concerns are about survival, not how would I pay
the electric bill. Yes, it is true that runaway health care costs are a serious
threat to our nation, but to imagine that the threat is only to our system of
paying health care for retirees is laughable.
The
good news is that health care inflation rates have tumbled since Obamacare
became law in 2010 — current estimates are about 1.3% per year — rendering the
doom and gloom of these reports even less relevant to the real world then they
were when they were made a couple of years ago.
This
is a big deal.
Providence
is said to have a $1.1 billion deficit, using those inflation rates. Rates of
1-2% instead of 7-8% over the next two or three years could cut $200 million
from Providence’s OPEB deficit and have a similar effect on everyone else’s
deficit.
The
lesson here is this: if you’re serious about fiscal responsibility, you prove
it by being serious about finding ways to reduce health care costs, which drive
the vast bulk of the increases in state and local government expenses over the
last 20 years.
You
do not show seriousness by simply negotiating these benefits out of contracts,
or by cutting benefits. Rising health care costs are a problem for everyone,
and a solution that benefits everyone is the only solution worth consideration.
