The Other Unfunded Liability

Attention is starting to be paid to the looming issue of unfunded public pension liabilities. These liabilities are massive—$18.6 billion at the state level alone in Massachusetts. And if you don’t think the state can hit its target return of 8.25% per year, every year until 2040, then the actual liability is probably a lot higher.

But there’s another liability that gets a lot less attention. It’s known as OPEB (“Other Post-Employment Benefits”). In plain English, OPEB is the set of health insurance promises that public entities make to their retirees. In Massachusetts, state employees with a minimum of 10 years of service are eligible for health insurance when they turn 55 (regardless of what age they were when the service occurred). It’s a generous benefit and the state (like most others) has been dealing with it on a pay-as-you-go basis. That approached worked OK, until healthcare costs started to rise strongly and consistently. Now the state is looking at a $16.6 billion unfunded liability with only a tenuous plan to provide partial funding in the future.

If you want to see what aggressive (one might call it realistic in some sense) funding does, look no further than last week’s news about the Post Office. A 10-year plan to fund their unfunded liability is, along with declining mail volumes and rising costs, driving the service into operating losses.

It’s not clear what the solution will be, but at least it’s forcing a realistic assessment of what benefits the USPS can afford, rather than transferring the burden to future generations like most other public entities are doing.