Unfunded teacher health benefits reach $231 billion nationwide
Amid soaring obligations, expert offers recommendations for states to reduce financial burden
September 12, 2018—New accounting standards have brought to light the dire state of funding for public-sector post-employment health-care benefits. Nationwide, the unfunded liability for teachers and other public education employees alone has reached approximately $231 billion. Though such benefits were designed to attract and retain high-quality workers, they are now costing all teachers money while benefiting only a fraction, priming the sector for more teacher demonstrations similar to the strikes and walkouts this spring. In a new article for Education Next, Chad Aldeman of Bellwether Education Partners explores the financial dilemma states and districts are facing and offers recommendations for reforming a system failing to deliver on its promise.
In 2017, 69 percent of public-school teachers were employed in states or districts that offer workers retiree health benefits, as compared to just 15 percent of private-sector workers. However, until recently no state calculated how much retiree health-care promises were worth, and few put anything aside to pay for them in the future. Today, 15 of 35 states offering retiree health benefits have zero dollars set aside to pay for their obligations—including Florida, New Jersey, and New York—and only ten states have more than 20 percent of liabilities set aside. Nationwide, future projected health-care costs for retirees are only 7 percent funded.
Aldeman suggests that states can reduce future liability costs through several reform options:
• Shift retiree health obligations to federal taxpayers. North Carolina recently announced it would not offer retiree health benefits to state workers who begin their employment after January 2021. The Affordable Care Act, which ties benefits to income, enables retirees to purchase health insurance regardless of age.
• Offer benefits only until age 65. After age 65, retirees are eligible for Medicare; employers could sponsor health savings accounts for workers who have the means and want to save on their own for additional medical expenses on top of Medicare.
• Change benefit type. States may shift focus from costly comprehensive healthcare plans to more modest “catastrophic” plans, which could be extended further to protect more families from unexpectedly high health-care burdens.
• Play the role of healthcare provider. Similar to the federal requirement to offer health-coverage to former employees, known as COBRA, states could shift their role from payer to provider, offering employees coverage for purchase with the benefit of group pricing. Five states currently follow this practice.
• Change the contribution mix. States can change their contribution model from a fixed-percentage payment to a fixed-dollar amount which limits the potential liabilities incurred and is currently used by seven states. At the minimum, states operating on a fixed-percentage payments model could shift a greater cost percentage to employees—however, the West Virginia teacher walkout was largely driven by this scenario.
Though retiree health benefits have historically been justified on the grounds of boosting teacher recruitment and retention, there are reasons to doubt how effective they are at accomplishing those goals. Research on teacher pension plans finds that only a small percentage of teachers remain on the job long enough to earn their pension, and if they do reach the maximum years of service, pension plans effectively push them into early retirement. A study of Illinois Public Schools finds that the same is true for post-employment health-care benefits.
To receive an embargoed copy of “Health Care for Life: Will teachers’ post-retirement benefits break the bank?” or to speak with the author, please contact Jackie Kerstetter at jackie.kerstetter@educationnext.org. The article will be available Tuesday, September 18 on www.educationnext.org and will appear in the Winter 2019 issue of Education Next, available in print on November 16, 2018.
About the Author: Chad Aldeman is a principal at Bellwether Education Partners and the editor of TeacherPensions.org.
About Education Next: Education Next is a scholarly journal committed to careful examination of evidence relating to school reform, published by the Education Next Institute and the Harvard Program on Education Policy and Governance at the Harvard Kennedy School. For more information, please visit www.educationnext.org.
