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NJ Digs Deeper Hole By Paying Just $2.4B of $8.8B Retiree Costs

It is the price of medical benefits for retirees who are under age 65 that is the biggest cost -- which is one of the reasons that retiree health benefits are a bigger issue for municipal governments in New Jersey than pensions: Police and firefighters who retire with 25 years of service in their late 40s can collect free family health benefits costing $25,000 a year or more before becoming eligible for Medicare at age 65, and can do so without penalty because the state has a “20 and out” law for uniformed personnel.

New Jersey teachers and state government workers – whose retiree healthcare costs are state-funded. And county and municipal government workers have seen their retirement age rise from 55 to 60 to 62 to 65 over a four-year period from 2007 to 2011, and are discouraged from retiring early by a provision in the 2011 pension law imposing a 3 percent deduction per year from their pensions for early retirement.

Unlike pensions, New Jersey has no provision to prefund retiree health benefits. However, recognizing that retiree health benefits posed a growing liability, the number of states setting aside at least some assets to prefund retiree health benefits grew from 18 states in a 2009-2011 survey conducted by Franzen and Brown to 25 states in a subsequent 2011-2012 survey.

Meanwhile, states also have been cutting benefit levels as well. According to a 2013 survey by the National Association of State Retirement Administrators, 25 percent of states increased the retirement premiums for retirees and 22 percent for their dependents, 21 percent hiked copayments for medical services, and 18 percent raised retirees’ deductible amounts. Another 8 percent increased the number of years required to vest for retiree health benefits, and 4 percent increased the age at which retirees could begin collecting medical benefits.

Christie left little doubt that he expected to seek cuts in both retiree healthcare and pension benefits when he unveils his plan to cut retiree costs. Speaking at the Peter G. Peterson Fiscal Summit 2014 in Washington, D.C., two weeks ago, Christie asserted that the only way for New Jersey to get its retiree costs under control is “to stop the insanity of a defined-benefit pension system that we cannot afford and of a healthcare system that Obamacare called a Cadillac plan.”

Renewing his warning at a Statehouse news conference last Tuesday, Christie asserted that the cost of the state’s healthcare plans for both current workers and retirees was so high that the state would “have to pay hundreds of millions of dollars in taxes to the federal government in a few years” under the Cadillac tax provision of President Obama’s Affordable Care Act that was designed to force down health insurance policy costs.

Christie also repeated his contention that the state cannot afford to pay more for the healthcare costs of retirees than it pays for active employees, but that contention is misleading: The state pays the healthcare costs of 93,600 state employees, while it pays the retiree healthcare costs not only of its 60,000 retired state workers, but also of New Jersey’s 91,700 retired teachers, whose preretirement healthcare costs were paid by the school districts that employ them, according to 2013 statistics contained in actuarial reports for the seven state pension systems submitted to the New Jersey Division of Pensions and Benefits.

With teachers excluded, the state pays $1.067 billion for the healthcare costs of active employees and $574.6 million for healthcare coverage for state government retirees.

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