In December the U.S. Government Accountability Office (GAO) released a report on retiree health benefits and the liabilities of the U.S. Postal System. Sounds pretty esoteric, right? We’re talking about one entry on the balance sheet of a government agency that is not particularly innovative or popular. Yawn.
And yet, this issue points directly to questions that will drive any future discussion of fiscal reform in the United States. It’s best to pay attention. For example, the GAO reports_
As of the end of fiscal year 2012, OPM estimated that USPS’s total health benefit liability for future and current retirees was approximately $94 billion—of which $48 billion was unfunded and $46 billion was in the Postal Service Retiree Health Benefit Fund.
In short, the U.S. Postal System has not set aside sufficient funds to pay for future expected healthcare costs of its retired employees. The Postal Accountability and Enhancement Act requires the USPS to make payments to prefund the expected future healthcare costs. Yet the USPS has been losing money every year. In response, management, employee unions and other stakeholders argue that the prepayment rule is contributing to the USPS’s already serious financial woes.
A requirement to pre-fund future healthcare costs (which will be massive) may not look like a harbinger of major fiscal reform. But it nonetheless shows the shifting forces in debates about government spending.
Even more interesting are the reforms related to healthcare, pensions, and other benefits for state-level public workers, many of which have been adopted in just the past few years.
A report by the National Conference of State Legislatures focuses only on pension reforms for public workers and teachers, covering the brief period of 2009-2011. It turns out that 43 states took at least some steps at pension reform. Of particular note are the reforms put in place in Michigan, Rhode Island and Utah.
In these three states and elsewhere, the common element is a move to replace a defined benefit pension with something approaching a defined contribution plan. The employee chooses a contribution level and the employer (the state) also makes a contribution up to a certain percentage of the employee’s salary. Of course, many private-sector employers made this move long ago (see, e.g., 401Ks and employer matching).
These ground-breaking reforms are significantly lowering liabilities that ultimately will be picked up by taxpayers. We’re talking about billions, if not tens of billions, of dollars of savings in each state.
There are many lessons to be learned from these experiences. How did political entrepreneurs in Michigan, Rhode Island, Utah and elsewhere make it happen? Why this idea, and at this time? What obstacles stood in the way of reform, and how were they overcome? What are the implications for other debates about entitlement reform?