Cullerton’s pension plan full of flawed logic

A union coalition opposed to pension reform is arguing that a plan advanced by Senate President John Cullerton would save $26 billion more in retiree health care coverage costs than a plan backed by House Speaker Michael Madigan. From the Associated Press: A study by the We Are One Illinois coalition shows that if half of...

A union coalition opposed to pension reform is arguing that a plan advanced by Senate President John Cullerton would save $26 billion more in retiree health care coverage costs than a plan backed by House Speaker Michael Madigan.

From the Associated Press:

A study by the We Are One Illinois coalition shows that if half of employees and retirees choose to forgo post-career health insurance as part of Senate President John Cullerton’s proposal, the state’s debt to two health insurance programs would be cut in half, by $26 billion.

The unions’ analysis assumes that if half of all current and retired workers opt out of retiree health insurance, then the liability will be cut in half. However, this simplistic assumption has several major flaws:

• It assumes that there will be no differences in health status between those who choose to keep their retiree health insurance and those who do not. But it’s likely that retirees and employees will consider how healthy they are before making this decision. Individuals with chronic conditions, for example, may value access to retiree health insurance more than their healthier co-workers. But if the people who opt out of retiree health insurance are generally healthier than those opting to keep it, the savings would likely be diminished.

• It assumes that there will be no differences in ages between the retirees who choose to keep their retiree health insurance and those who do not. This assumes that a retiree with a state-funded Medicare supplement values that benefit the same as an early retiree receiving full insurance benefits because he or she is not yet eligible for Medicare. But the cost of providing an early retiree with health insurance is 2.5 times the cost of providing a Medicare supplement to an older retiree. If the retirees who opt out of retiree health insurance are generally older, the savings would be substantially diminished.

• It assumes that there will be no differences in ages between the current employees who choose to keep their retiree health insurance and those who do not. This assumes that young, healthy workers will value retiree health insurance benefits the same as workers nearing retirement age. This is important because the younger a worker is, the lower the accrued liability for his or her retiree health benefits. The present value of health benefits that won’t be paid for another 30 years is far, far less than the present value of benefits that will begin to be paid in five years. If the current workers opting out of retiree health insurance are generally younger, the savings would be diminished.

If the unions really cared about achieving savings, they’d offer to nix retiree health insurance costs altogether, saving $54 billion in accrued liability. (The unions separately argue that any changes to retiree health insurance are unconstitutional.)

As we’ve argued, both Cullerton’s approach and Madigan’s plan get us nowhere near the savings we’ll need to have any hope of rescuing the pension systems in the long run. Only major reforms, likemoving to 401(k)-style plans for all future work and tackling the automatic, compounded cost-of-living adjustment, can get the problem under control.