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Retiree healthcare gap to burden U.S. states, cities: economists

A man soaks his feet in a fountain while reading a magazine on the Rose Kennedy Greenway on a warm summer afternoon in Boston, Massachusetts
A man soaks his feet in a fountain while reading a magazine on the Rose Kennedy Greenway on a warm summer afternoon in Boston, Massachusetts

By Hilary Russ

(Reuters) - U.S. state and local governments have about $1 trillion of unfunded retiree healthcare liabilities, a shortfall that is expected to pressure budgets in the near future even more than pension costs, two Federal Reserve Board of Governors senior economists said on Thursday.

"Because retiree health obligations are mostly unfunded, they exert pressure on state and local budgets long before the pension plans do, even though the size of the pension problem is significantly greater in the long run," wrote Byron Lutz and Louise Sheiner in a paper to be published in the next couple of months.

The future pension shortfall is about twice as large and will supplant retiree healthcare concerns in the long term, the two economists said.

The authors discussed their preliminary findings, which are their own opinions and not those of the Federal Reserve, at a municipal finance conference in Boston. They expect to release full results as a working paper later this year.

America's public pension systems have been in the spotlight as mounting costs threaten to crowd out services in areas where pensions are more poorly funded. Growing pension and healthcare costs are among the reasons behind municipal bankruptcies, such as the filing in July by Detroit, or the cases of Stockton and San Bernardino in California.

Retiree healthcare benefits have fewer legal protections than pensions, which are often protected by state laws. But such benefits are largely unfunded in the United States, with most states and cities paying as they go. By contrast, public pension funds are between roughly 60 to 73 percent funded on aggregate, depending on how they're measured.

Many public employees retire before reaching the age of 65, which leaves municipalities to pay for their coverage until they become eligible for the federal Medicare healthcare program for the elderly.

The city of Detroit is seeking to force retirees onto insurance exchanges created under federal healthcare reform in order to shed their healthcare liabilities. Also this year, Chicago proposed a plan to migrate most of its 30,000 retirees to the state exchanges by 2017.

The preliminary $1 trillion figure from Lutz and Sheiner is on par with previous estimates. Last year, the Pew Center on the States reported that the nation has a $627 billion unfunded retiree healthcare liability just at the state level.

Another Pew study in March found that 30 U.S. cities also had a $104 billion long-term shortfall in healthcare for retirees.

(Reporting by Hilary Russ in New York; Editing by Tiziana Barghini and Eric Beech)

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