The problem
Illinoisans are beginning to see the dangers of another unfunded liability: free or subsidized health care for retired state workers. The state has promised, in today’s dollars, nearly $44 billion in retiree health benefits to government employees over the next thirty years. Unfortunately, it has not set aside any funds for those future payments. These unfunded liabilities are growing 2½ times faster than state revenues and, if left unreformed, will work in tandem with rising pension costs to dramatically cut government services.

Many state retirees contribute little or nothing to their health insurance premiums. In fact, for the state’s largest retiree health program, retirees only contribute 9 percent toward their premiums. That’s a lot less than other states, which require state retirees to pay six times that amount. In the private sector, the vast majority of retirees are not offered coverage at all, and the few who are must pay the majority of their insurance costs. To make matters worse, the state’s health coverage policies incentivize early retirement of state employees, significantly driving up costs for the state.

The state’s prioritization of retirees over core government services and the social safety net has hurt many. As the cost of providing these generous benefits continues to climb, it only will get worse.

Our solution
Illinois needs a long-term solution to the skyrocketing costs of providing state retirees with health insurance. The state can achieve immediate savings by benchmarking retiree contributions to average contributions retirees make in other states. Moving forward, Illinois should cap subsidies to new retirees at the Medicare supplement level and stop offering the benefit to newly hired employees.

Why this works
Illinois taxpayers would save more than $40 billion over the course of the next thirty years simply by benchmarking retiree contributions to the average contributions required in other states. Even after this adjustment, benefits for public sector retirees would still be far more generous than benefits for private sector retirees. These savings could be realized by basing premium subsidies on income, age at retirement and years of service. This would ensure that life-long public servants are still rewarded for their service and that those retirees with limited incomes are still protected.

Illinois could also see significant savings by offering less generous subsidies to those who chose to retire early. The state should not be rewarding these retirees for choosing to retire early. Beginning in fiscal year 2013, the state should cap subsidies for all new retirees at the same level the state pays for Medicare-eligible retirees in the same benefit points and income brackets. Because early retirees are the most expensive to cover, this proposal would save the state several billion dollars during the next 30 years.

Finally, by ending this benefit for newly hired employees, Illinois could ultimately eliminate its future retiree health care liabilities. The state already has increased the pension “full benefit” retirement age to 67 for these employees, meaning that they will be eligible for Medicare by the time they retire, making the state’s supplemental coverage largely unnecessary. If they wish to keep this coverage, they should be responsible for the entirety of their premiums. This ultimately would eliminate the state’s future liabilities, showing the light at the end of the tunnel as the state pays down the obligations already incurred.

By getting these costs under control, Illinois can protect the core government services and social safety net from seeing their funding dissipate in order to pay for health insurance subsidies for well-off retirees.