The Governmental Accounting Standards Board (GASB) shook the foundations of many Americans’ financial confidence earlier this month when it released two “statements,” or guidelines, for reporting on government employers’ “other post-employment benefits” (OPEB).
The term “OPEB” refers mainly to the retiree health benefits state and local employers have promised their workers over the decades in exchange for labor peace.
Statement 74 applies to plans that manage OPEB benefits for governments, and that statement applies for fiscal years beginning after June 15, 2016.
Statement 75 applies to governments that provide OPEB for their employees. That statement takes effect for fiscal years beginning after June 15, 2017.
Analysts at Milliman, an actuarial consulting firm, describe the changes this way: “For most [affected] employers, the result will be an increase in the balance sheet liability and a significant increase in the volatility of the annual OPEB expense.”
In other words: Many government employers will have to be more open about the reality that the retiree health benefits they promised — or in some cases, “promised” (wink wink) — are probably not going to materialize, or, at least, not materialize in the form that the sponsors and the workers originally envisioned.
Grim discoveries about the fragile state of OPEB promises have played a major role in the bankruptcies of Detroit and of Stockton, Calif.
Congress supposedly requires the U.S. Postal Service to set money aside to pay back its OPEB promises. The Postal Service has rarely been able to make good on that OPEB funding requirement, and occasional news coverage of its efforts to postpone having to try to achieve impossible goals further emphasizes the utopian nature of OPEB promises.
And, of course, the private employers that offer retiree health benefits and general public retirement benefits programs face similar challenges.
Certainly, Congress can have the Federal Reserve “just print money” to make good on Medicare and Medicaid promises in the 2040s and 2050s, but the results may not be great for the overall economy, and may not actually lead to the government being able to get the beneficiaries the kind of care they thought they’d be able to afford.
Maybe you sell health insurance, long-term care insurance or retirement planning products and services. Why should you care about the OPEB disillusionment crisis?
For some ideas on why and how the crisis can make you look good, read on.
1. You talk about something that matters.
Maybe you got into insurance because, really, you just weren’t good enough at physics to go into engineering and develop new cellular telephones, or good enough at programming to go into software and develop hot cell phone apps, or good enough at schmoozing and sounding as if you went to Oxford to go into investment banking.
So, anyhow, what’s more important: Knowing how to format a line graph in a PowerPoint presentation to persuade mutual fund and private equity managers that consumers will spend $500 billion per year on ski resort snowfall apps in 2030, guaranteed, or helping consumers prepare for a challenging future?
2. You translate the big words into English.
“Because OPEB promises represent a very significant liability for many state and local governments, it is critical that taxpayers, policy makers, bond analysts and others are equipped with enhanced information, which will enable them to better assess the related financial obligations and annual costs of providing OPEB,” the Milliman analysts advise their firm’s clients.
Of course, you know who else needs to be “equipped with enhanced information”: the people who’ve been counting on the OPEB benefits.
And who, precisely, will be the real source of the “enhanced information” for the plan participants?
In many cases, that source of enhanced information may well be you.
3. You help clients do the math.
Everyone and his brother, and his sister, has a Web calculator that tell consumers how to plan for post-retirement health benefits, based partly on the assumption the employer and public programs will meet their obligations.
You can help make sure clients also see the projections that show what might happen if public and private programs don’t do an especially good job of meeting their obligations.
4. You explain what the employer plan sponsors are up against.
Especially given the rhetoric that will fly around during an election year, consumers may look at grim analyses about the future of OPEB and think that the evil “Top 1 percenters,” or “Top 0.1 percenters,” have pocketed the OPEB funding money.
You can lean on Milliman and its competitors and (if possible, given whatever approval processes you have to go through), use Pension Funding Index reports to show how low interest rates ate quite a bit of the OPEB funding.
We as a society chose to shift money into banks, home mortgages, and the stocks of publicly traded companies, and away from the instruments that employers and their plan administrators typically use to feed cash into pensions and OPEB.
5. You offer tools clients can use to plan for future acute care costs.
“Past performance does not predict future results,” but it might not hurt for clients to have annuities or other arrangements feeding cash into hospital indemnity products, critical illness insurance products or local concierge medicine program arrangements that can stay in effect when the clients are past age 65.
Even if issuers withdraw products from the market, “financial preppers” may get help from grandfathering provisions or conversion rights programs that put them ahead of consumers who failed to plan for harder times.
6. You offer tools clients can use to plan for future long-term care (LTC) costs.
In spite of the gloomy headlines, preparing for growing challenges with paying future LTC bills in a no-OPEB or less-OPEB world is actually easier than preparing for future acute health care bills.
No companies sell products for covering future acute health care costs.
Many companies still sell stand-alone long-term care insurance (LTC) and annuity- and life-LTC hybrid products. Even with all of the LTCI rate increases, buyers have still been able to limit growth in the cost of prefunding LTC costs to less than 10 percent per year.
Even if the performance of products is different from what the clients hope, the consumers may still end up being in much better shape than consumers who blew the money on nonessential items.
7. Even if you turned out to be wrong about some things, or everything, you give clients a framework to think about all of this for themselves.
Plenty of things could go better than expected. Maybe gross domestic product (GDP) growth and pension fund asset growth will soon be much higher than expected, and that will save the country’s OPEB bacon.
Or maybe scientists will soon develop cures for many of the afflictions of old age, and that will give us a surprise happy ending.
Or, maybe the situation will be so dire that no products you sell clients could do much good.
Whatever happens: At least you can give your clients an understanding of the forces shaping their future, instead of letting them float along like leaves in a river. Your clients can have the knowledge they need to take charge of managing their own fate.
Image: TS Photo/Alex Mann