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Postretirement Medical Coverage in Ohio
Two Buckeye State educators make the case for state-supported coverage for retirees.
By Saul W. Adelman and Mark L. Cross
The Ohio State Teacher Retirement System (STRS) provides retirement, survivor, and disability benefits to public school (K–12) teachers, college and university professors employed by state institutions, and the spouses and eligible dependents of these employees. In doing so, it operates much like other state retirement systems. The money to support the benefits comes from the pay of the teachers and professors (approximately 10 percent of payroll), employers (approximately 14 percent of payroll), and investment earnings on the contributions. The Ohio STRS is not required to provide retiree health coverage, but, like many other state teacher retirement systems, it subsidizes retiree health-care costs. The demand for employer-sponsored retiree health care is high among public school teachers, their spouses, and dependents. Many states permit publicly employed educators to retire without reduced benefits at any age if they have served for thirty years. Given that most teachers start their public school careers in their early twenties and remain in the same state, many retire between the ages of fifty and fifty-five.
The pattern differs in higher education. Professors typically begin their careers five to ten years later than public school teachers because of the need to earn an advanced degree to teach at the college level. Public school teachers who relocate to a different public school, but remain in the same state, continue in the same retirement system. Professors, however, often move out of state when they change jobs, leaving one retirement system for another. When they do so, their contributions to the state plan they exit are frozen, along with their years-of-service credit. They may enter a similar system in another state, or they may find themselves in an entirely different type of retirement system.
Retiring teachers and professors who are covered under Medicare must wait until age sixty-five to receive benefits.1 Most states, however, did not require publicly employed teachers and professors hired before 1986 to be covered under Medicare; thus most of those reaching retirement age now are not covered. The fact that many teachers retire before age sixty-five or do not have Medicare coverage makes retiree health coverage even more important to them and their families.
Escalating Costs
The table accompanying this article (.pdf) shows the cost of retiree health insurance in Ohio for retirees who do and do not have Medicare coverage. This cost does not include co-pays, deductibles, or other out-of-pocket costs. A retiree who does not have Medicare or who is under sixty-five with a spouse pays an average of $631 a month for health care, and the Ohio STRS contributes $428 toward a total monthly bill of $1,059. Even retirees with spouses who have Medicare pay $300 a month of a total monthly bill of $470. These premiums are much higher than those paid by currently employed teachers and represent a significant burden to most retirees.
The Ohio STRS began providing health coverage for retired teachers and their families in 1974. In the 1980s, as the cost of health care escalated, the state established a fund to help pay for future costs. The funding for retiree health coverage comes from health premiums paid by participating retirees, a portion of the employer’s 14 percent contribution to the STRS, and investment earnings from the insurance fund. The Ohio Health Fund has $3 billion in assets today and should last until 2018. Unfortunately, large increases in health-care costs, along with big declines in investment earnings since the early 2000s, are depleting the fund. Many other states are in the same position as Ohio when it comes to funding teacher retiree health coverage, and all states will face this problem eventually.
Possible Solutions
The Ohio STRS could continue to pass on increases in health-care costs to retirees in the form of higher premiums, deductibles, and co-pays. If it did so, premiums for retirees might rise to the point where some would have to choose between buying food and housing and purchasing health care. If the Ohio STRS subsidy were to be eliminated for retirees without Medicare in 2007, they would have to pay $553 a month in health-care premiums alone (and more than $1,000 if they had nonteaching spouses).
Clearly, the Ohio STRS needs a new source of dedicated revenue to help offset the cost of retiree health care. This revenue stream should be greatest during the next ten to fifteen years. In fifteen years, almost all teachers and professors older than sixty-five (those who started work after 1986) will be covered under Medicare and eligible for the lower premiums shown in the table. Thus these individuals will not require as large a subsidy from the Ohio STRS. However, workers younger than sixty-five and not yet eligible for Medicare will still face the higher premiums and need the higher Ohio STRS subsidy.
The revenue to subsidize retiree health premiums could come from several sources. An existing tax—such as the tax on sales, cigarettes, or income—could be raised. Or a new tax could be created. However, recent tax increases, a shaky economy, and probable public displeasure would seem to rule out such a strategy—not to mention the fact that Ohio is trying to streamline its tax code and make it more business friendly. Alternatively, the state could shift funds from another use to help subsidize the health premiums, but a tight budget and recent budget cuts probably makes this approach impractical.
Increasing the contribution rates to the Ohio STRS is another possibility. In fact, a coalition of education organizations (known as the Health Care Advocates for STRS) proposed that the legislature increase employee and employer contribution rates to the Ohio STRS by 2.5 percent. Such an increase would create a dedicated revenue stream to help provide health-care benefits to Ohio’s current and future retired teachers. The fact that the actual users of the services would pay for the increase would make it more palatable to the public.
Under this approach, the employee and the employer would eventually pay an additional 2.5 percent of payroll to the Ohio STRS, and the tax would be implemented in 0.50 percent increments over five years. Other states faced with retiree health-funding problems will shortly have to undertake similar measures to shore up their plans.
Uncertainties
If such a payroll tax is implemented to cover retiree health care, several questions need to be addressed. Do all educators plan to retire before age sixty-five? How many teachers are currently not covered by Medicare? Should we permit current teachers, or at least those older than fifty-five or sixty, to choose not to pay the 2.5 percent payroll tax premium if the plan is implemented? Should we allow newly hired teachers to decide whether they want to participate in the retiree health-insurance plan and pay the payroll tax? If an employee (such as a college educator) plans to retire after age sixty-five and will have Medicare, why would he or she choose to pay the premiums, since no STRS subsidy would ever be received if he or she chooses not to enroll in the STRS health plan and only have Medicare coverage? Why force employees to pay for coverage they never intend to use? (We assume that the health care of those on STRS disability, regardless of their age, will be provided by STRS independently of their having chosen to pay the payroll tax premium for retiree health coverage.)
Why would a Medicare-covered educator enroll in an STRS healthcare program? Perhaps the program would provide better coverage than Medicare, or maybe the participant doesn’t know whether he or she will retire before age sixty-five. In 2007, for less than the $300 monthly premium to the Ohio STRS, Medicare-covered retirees could purchase for themselves and their spouses an excellent Medicare supplemental policy. Does the Ohio STRS even need to offer a coverage option for nonteaching spouses of retirees over sixty-five who are eligible for Medicare?
For employees who plan to retire before age sixty-five or who choose not to buy Medicare Parts A and B, the choice to enroll in and pay the premium for retiree health insurance makes sense. In such a case, Medicare will not cover the retired employee and, because the employee is retired, the school district or institution of higher education will no longer cover the individual as an active teacher. Because the retiree’s only recourse may very well be the health-care coverage offered under the Ohio STRS, he or she would choose to enroll and pay for the coverage.
In future years, if rising healthcare costs force the federal government to assume responsibility for the health care of people of all ages (that is, expand Medicare to all citizens), the uncertainty about funding retiree health care will be resolved. In the meantime, all states need to search for ways to make sure that those who retire from public employment have access to adequate health care.
Note
1. For details about Medicare, see http://www.medicare.gov. Back to text
Saul W. Adelman is an associate professor in the Farmer School of Business at Miami University of Ohio. He is co-author of Professional Financial Planning: Insuring Economic Security. Mark L. Cross is the Ohio Casualty Professor of Insurance in the Farmer School of Business at Miami University of Ohio. He researches retirement planning, the financial strength of insurance companies, and efficient market theory as it applies to the insurance industry. Adelman’s e-mail address is adelmasw@muohio.edu. Cross’s address is crossml@muohio.edu.
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