Unions Complicit in Retirement Benefit Crisis

Public sector union members protested at the state capitol this week because lawmakers are considering reforms to post-employment health insurance benefits promised by local governments to their employees. Union officials loudly proclaim that these benefits should not be cut, and it’s not clear that the recently introduced package would cut them.

That said, nothing in state law requires local governments to offer post-retirement health insurance benefits, which are rare in the private sector. Moreover, everyone in both the private and public sectors gets Medicare benefits when they reach age 65.

The problem is that local officials have promised these benefits to their employees but have not set aside enough money to pay for them. This means the cost of today’s government workers is being shifted to tomorrow’s taxpayers.

This is different from government pension benefits, which are required by the Michigan Constitution to be funded in the same year they are earned. Government employers annually contribute money to a pension fund to provide for another year’s worth of pension benefits earned by their employees. The money goes into investments that are eventually used to cover the monthly pension benefit checks sent to retirees.

Prefunding pensions ensures that the costs of today’s government employees are paid by those who receive the services they provide. But with government retiree health insurance, today’s services are paid years later by taxpayers who may not even have been alive when the benefits were pledged.

Also unlike pensions, government retiree health insurance benefits are not a legally binding obligation – they can be trimmed or even eliminated at any time by government employers.

It’s an atrocious deal for everyone involved: the employees, government managers and taxpayers. Employees can’t trust that benefits will be there when they retire, the cost of providing them stretches government resources thin, and taxpayers get stuck with an unknown financial burden.

If Michigan government employees and their unions really think these benefits are vital they should negotiate with employers to have them prefunded. That may seem like common sense but is in fact rare. Only a few local governments in Michigan have set aside money to pay for the benefits or else never promised them to begin with.

And union officials are complicit in this. They have worked with government managers to kick retiree health insurance costs to future taxpayers. Without legal guarantees, unions should have ensured that money was set aside to pay for these benefits and could have demanded this at the bargaining table. But they didn’t.

If public sector union officials fail to take these benefit promises seriously that does not absolve local government managers from doing so. These costs have caught up with many municipalities and they may have to trim them back.

The state could help by putting a freeze on local government wage increases until these benefits are funded or renegotiated. That would ensure that both managers and employee groups start taking the costs of these benefits seriously.