Pensions and the Challenge to Health Care

I am not a finance guy, but was struck by what I read in the New York Times this morning:

Despite its pension reform, Illinois is still in deep trouble. That vaunted $300 million in immediate savings? The state produced it by giving itself credit now for the much smaller checks it will send retirees many years in the future — people who must first be hired and then, for full benefits, work until age 67.

By recognizing those far-off savings right away, Illinois is letting itself put less money into its pension fund now, starting with $300 million this year.

That saves the state money, but it also weakens the pension fund, actually a family of funds, raising the risk of a collapse long before the real savings start to materialize.

“We’re within a few years of having some of the pension funds run out of money,” said R. Eden Martin, president of the Commercial Club of Chicago, a business group that has been warning of a “financial implosion” for several years. “Funding for the schools is going to be cut radically. Funding for Medicaid. (emphasis mine) As these things all mount up, there’s going to be a lot of outrage.”

Joshua D. Rauh, an associate professor of finance at Northwestern University who studies public pension funds, predicts that at the current rate, Illinois’s pension system could run out of money by 2018. He believes the funds of other troubled states — including New Jersey, Indiana and Connecticut — are also on track to run out of money in less than a decade, unless they make meaningful changes.

If a state pension fund ran out of money, the state would be legally bound to make good on retirees’ benefits. But paying public pensions straight out of general revenue would be ruinous. In Illinois’s case, it would consume about half the state’s cash every year, bringing other vital state services to a standstill.

Of course, Illinois hospital systems know this. They are, after all, some of the largest and most lucrative employers in our state and are very savvy when it comes to the money of medicine.

As a result, large hospital systems purchase credit default swaps to hedge against the collapse of the Illinois bond market. Just this week, the price for those "swaps" (derivatives) just exceeded those for the state of California and are approaching the swap price for Greece.

All because the current union members want their pensions, some as early as age 55.

This presents very real problems for Medicaid patients:

Of the 32 million uninsured Americans expected to gain health coverage under the new law, as many as 20 million will be insured by Medicaid, experts estimate. Asset tests will be largely eliminated, so workers who lose their jobs can get health coverage even if they own their homes or have money saved for retirement. (Illegal immigrants will not be eligible.)

Absorbing that many people into the system will not be easy. The program is administered and partly financed by the states, which are now racing to figure out how to carry out the necessary changes and simplify enrollment even as they struggle to cope with severe budget cuts and staff shortages.

Many residents don’t realize they will be eligible, and it will be up to the states to let them know. And the program has long been haunted by questions about quality of care.

But why worry? Who cares if the states can't pay their Medicaid tab. The federal government will pay for the pension shortfall, right?

And it won't cost a thing... really...

-Wes