Category Archives: Retirement

The Role of Retiree Health Insurance in the Early Retirement of Public Sector Employees

Source: John B. Shoven, Sita Slavov, National Bureau of Economic Research (NBER), NBER Working Paper No. 19563, October 2013
(subscription required)

From the abstract:
Most private sector workers with employer-provided health insurance have a strong incentive to continue working until Medicare eligibility in order to maintain group health coverage. However, most government employees have access to retiree health coverage, which allows them access to group health coverage even if they retire before Medicare eligibility. We study the impact of retiree health coverage on the probability of stopping work among public sector workers between the ages of 55 and 64. We find that, for state and local government employees, retiree health coverage raises the probability of stopping work by 5.1 percentage points (around 28 percent) between ages 60 and 64. However, we find no evidence that retiree health coverage influences state and local employees’ decisions to stop work at ages 55-59, or that such coverage has an effect on the probability of stopping work for federal and military employees.

The Fiscal Stress Arising from State and Local Retiree Health Obligations

Source: Byron F. Lutz, Louise Sheiner, National Bureau of Economic Research (NBER), NBER Working Paper No. w19779, January 2014
(subscription required)

From the abstract:
A major factor weighing down the long-term finances of state and local governments is the obligation to fund retiree benefits. While state and local government pension obligations have been analyzed in great detail, much less attention has been paid to the costs of the other major retiree benefit provided by these governments: retiree health insurance. The first portion of the paper uses the information contained in the annual actuarial reports for public retiree health plans to reverse engineer the cash flows underlying the liabilities given in the report. Obtaining the cash flows allows us to construct liability estimates which are consistent across governments in terms of the discount rate, actuarial method and assumptions concerning medical cost inflation and mortality. We find that the total unfunded accrued liability of state and local governments for the provision of retiree health care exceeds $1 trillion, or about 1⁄3 of total state and local government revenue. Relative to pension obligations discounted at the same rate, we find that unfunded retiree health care liabilities are 1⁄2 the size of unfunded pension obligations. We also find that using assumptions concerning the growth in health care costs that are arguably more realistic than those employed by most states actually reduces the size of the liability in most cases. Pushing in the opposite direction, we find that using plausibly more realistic mortality assumptions increases the size of liability. The second portion of the paper places retiree health care obligations into context by examining the budget pressures associated with retiree health on a continuing, largely pay-as-you go basis. We find that much of the projected increase in retiree health obligations as a share of revenue is the result of health care cost growth. On average, states could put their retiree health obligations into long-run fiscal balance by contributing an additional 3⁄4 percent of total revenue toward the benefit each year. There is, however, wide variation across the states, with the majority of states requiring little in the way of additional financing, but some states requiring a significantly larger increase.

California Pension System Tests New Money-Saving Strategy

Source: Penelope Lemov, Governing, December 12, 2013

A pilot program in California is using “reference pricing” to cap health-care costs. Can the strategy be used by others?

What does grocery store chain Krogers and the California Public Employees’ Pension System (CalPERS) have in common? The world’s fourth largest retailer and the country’s largest pension system are trying to tame health-care costs by using something called “reference pricing.”

What is reference pricing? It is a variation on price caps: The payer, in this case Kroger or CalPERS, sets the price it will pay for, say, hip replacement surgery or an MRI. Beneficiaries are free to pick any provider they wish to use, but if the price is above the one the payer set (the reference price), the consumer pays the difference. Reference pricing is used mainly for prescription drugs, imaging tests and elective procedures where providers are widely available and there is not much variation in quality.

To see why CalPERS has turned to reference pricing, I caught up with David Cowling, who heads up the pension plan’s Center for Innovation. What follows is an edited version of our conversation. …

Source: U.S. Department of Health and Human Services, 2-14

Sections include:

The Basics
Just beginning to think about long-term care? Start here; it’s more than just insurance. — What is Long-Term Care?, Who Needs Care, How Much Care Will You Need?, Who Will Provide Your Care?, Where Can You Receive Care?, Who Pays for Long-Term Care?, Long-term Care Considerations for LGBT Adults, Alzheimer’s, Avoiding a Fall, Glossary, Finding Local Services

Medicare, Medicaid & More

Find out what is covered and what is not. — Medicare, State Medicaid Programs, Veterans Affairs Benefits, Other State Programs

Where You Live Matters

Is your home, community and state well-suited for aging/long-term care? — Staying in Your Home, Living in a Facility

How to Decide

Protect your family by thinking ahead and making your decisions known. — Advance Care Plan Considerations, Will I Need a Lawyer, Legal Steps for Medical Well-being, Legal Steps for Financial Well-being

Costs & How to Pay

Long-term care is expensive, but there are several ways to pay for the care you may need. — Costs of Care, Costs of Care in Your State, What is Covered by Health & Disability Insurance?, What is Long-term Care Insurance?, Using Life Insurance to Pay for Long-term Care, Paying Privately

Strengthening the Security of Public Sector Defined Benefit Plans

Source: Donald J. Boyd and Peter J. Kiernan, Nelson A. Rockefeller Institute of Government, Blinken Report, January 2014

State and local government defined benefit pension systems, which pay benefits to more than eight million people and cover more than fourteen million workers, are deeply troubled. They are underfunded by at least $2 to 3 trillion using standard economic measures, and by $1 trillion using measurement practices virtually unique to the public sector pension industry. In response, governments have been raising contributions, cutting services and investments in other areas, raising taxes, cutting benefits for new workers, and even cutting benefits for current workers and retirees.

This is a national concern, affecting retirement security for one-sixth of the workforce, some of whom receive a government public pension in lieu of Social Security coverage, and affecting the capacity of state and local governments to make investments and deliver needed services. We offer this analysis of the problem, and recommendations for correcting the system that allowed this to happen. Public sector defined benefit plans are an important component of the nation’s retirement security, and can and should be structured to fund benefits securely.

Flaws of adopting cost cutting in switching to DC plans

Source: Diane Oakley, Pensions & Investments, January 20, 2014

Thinking back to 2007 — before the financial crisis — public pension plans in the aggregate had nearly 90% of the assets on hand required to pay retirement benefits due decades in the future. However, like all investors, public pension funds took a deep hit when the financial markets melted down in 2008. With markets in a downward freefall, pension assets plummeted, unfunded liabilities grew and pressure mounted on state policymakers to enact reforms. Even states with well-funded plans were prudent to closely examine their retirement systems, while policymakers in states that had fallen behind on their contributions prior to the Wall Street crisis faced tough decisions.

Since that time, 48 states have enacted reforms to their pension plans. The overwhelming majority of states acted to ensure the sustainability of their traditional pension structures by adjusting benefits and increasing employee and employer contributions. Specifically, the states enacted one or more reforms: 40 states reduced future pension benefits; 30 states required employees to increase their contributions; 21 states reduced cost-of-living adjustments for retirees; and 11 states statutorily increased the employers’ pension contributions. …

…Although the environment back in 2008 appeared fertile for a wholesale switch to individual defined contribution accounts from defined benefit pensions, it never happened. That begs the question — why did policymakers stick with their defined benefit plans in the face of financial pressure and the corporate trend away from them?

One explanation is that the move away from defined benefit plans in the private sector is rooted in federal regulations that aren’t applicable to public systems. These rules create sizable funding volatility and unpredictability for corporate plan sponsors.

Another explanation is that state policymakers heeded the data in actuarial analyses that indicated closing public pensions would not address funding shortfalls. Take for example the experience of West Virginia’s pension reform in the 1990s, which now is a cautionary tale for policymakers. West Virginia learned the hard way that a switch to defined contribution accounts from defined benefit plans does nothing to close unfunded pension liabilities, and can leave employees unable to retire. …

Aging in Place

Source: Rachelle Levitt, U.S. Department of Housing and Urban Development, Evidence Matters, Fall 2013

From the abstract:
The feature article, “Aging in Place: Facilitating Choice and Independence,” reviews the trends underpinning the issue and looks at the federal, state, and local programs and policies for the elderly that are accommodating a shift away from institutional living and toward aging in place with supports. The Research Spotlight article, “Measuring the Costs and Savings of Aging in Place,” examines efforts to measure the potential health cost savings (as well as improvements in well-being) to families and the government when individuals are able to age in their homes with assistance, reinforcing the argument that housing matters. Finally, grassroots efforts to aid the elderly in their communities and provide practical solutions for the supportive services necessary to age in place are examined in the In Practice article, “Community-Centered Solutions for Aging at Home.” Readers may find that the issues involved in creating aging-friendly communities have much in common with the issues involved in building livable communities, such as the role that density and transit systems can play in providing access to neighborhood amenities.

The Social Security Windfall Elimination and Government Pension Offset Provisions for Public Employees in the Health and Retirement Study

Source: Alan L. Gustman, Thomas L. Steinmeier, Nahid Tabatabai, Michigan Retirement Research Center Research Paper No. 2013-288, January 8, 2014

From the abstract:
This paper uses data from the Health and Retirement Study to investigate the effects of Social Security’s Windfall Elimination Provision (WEP) and Government Pension Offset (GPO) provision on Social Security benefits received by individuals and households. WEP reduces the benefits of individuals who worked in jobs covered by Social Security and also worked in uncovered jobs where a pension was earned. WEP also reduces spouse benefits. GPO reduces spouse and survivor benefits for persons who worked in uncovered government employment where they also earned a pension.

Unlike previous studies, we take explicit account of pensions earned on jobs not covered by Social Security, a key determinant of the size of WEP and GPO adjustments. Also unlike previous studies, we focus on the household. This allows us to incorporate the full effects of WEP and GPO on spouse and survivor benefits, and to evaluate the effects of WEP and GPO on the assets accumulated by affected families.

Among our specific findings: About 3.5 percent of households are subject to either WEP or to GPO. The present value of their Social Security benefits is reduced by roughly one fifth. This amounts to five to six percent of the total wealth they accumulate before retirement. Households affected by both WEP and GPO lose about one third of their benefit. Limiting the Social Security benefit to half the size of the pension from uncovered employment reduces the penalty from WEP for members of the original HRS cohort by about 60 percent.