The OPEB Off-Ramp: How to Phase Out State and Local Governments’ Retiree Health Care Costs

Public awareness of U.S. states’ and cities’ retirement cost burden has increased in recent years; but contrary to popular perception, the problem is not limited to pensions. The long-term bill for retiree health care (other post-employment benefits, or OPEB) has been estimated at over a trillion dollars.

The persistence of retiree health care in state and local governments is partly a consequence of the influence of government unions: states with unionization rates above that of the national average (28.5 percent) have nearly three times larger per-capita OPEB liabilities. Union strength is a problem but not entirely to blame for large OPEB obligations—many southern states with weak labor unions have high OPEB liabilities.

Governments have too much OPEB debt because of policymakers’ willingness to promise benefits in the future to satisfy interest groups in the present; this problem is combined with the standard, and misguided, public-sector preference for backloading compensation into retirement, as well as an inability or unwillingness to cut costs.

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