A study from Pew Charitable Trusts points out that the average OPEB (other post-employment benefits) plan in the U.S. today is only 6.7% funded, and the total liability is approaching $700 billion.  Shockingly, assets set-aside to meet this promise total <$50 billion.  As you can guess, most of the liability is related to post-employment healthcare benefits.

Only 8 states have funded ratios >30% (Arizona is #1 at 92%), while 19 states have funded ratios <1%. These pay-as-you-go systems are subjecting these liabilities to higher inflation rates, escalating future costs, as opposed to pre-funding these benefits.

Several states have accrued net OPEB liabilities totaling in excess of 10% of the personal income generated within their borders. According to the Pew analysis, “The primary driver for the variation in OPEB liabilities is the difference in how states structure health care benefits for retirees. As a percentage of personal income, the liabilities range from less than 1 percent in 16 states to 16 percent in New Jersey.  Alaska has the highest ratio of liabilities to personal income at 42 percent.”

Obviously, this burgeoning liability will put further pressure on the funding of state DB plans. As the Baby Boomer generation ages, greater funding will be necessary to meet retiree demands for both healthcare and retirement.  Can these systems survive? We are likely only one more great financial crisis away from seeing many of these plans shuttered. Now is not the time to continue to inject risk into the pension system in pursuit of the ROA

We are likely only one more great financial crisis away from seeing many of these plans shuttered. Now is not the time to continue to inject risk into the pension system in pursuit of the ROA. These plans should be de-risked before it is too late.