In addition to annual pension payments, government retirement systems also typically provide health insurance coverage for retirees. The mechanism for funding these benefits is different from pension benefits. Instead of being prefunded, retiree health insurance tends to be funded on a pay-as-you-go basis.[*] In other words, governments simply pay these bills as they come due. Retirement systems typically include an assessment on employee payroll to pay these insurance costs.

The Michigan Supreme Court has ruled that retiree health insurance benefits are not subject to the protections offered to pension benefits in the Michigan Constitution.[48]Government managers are not under any obligation to prefund or pay these benefits.[†] In addition, state courts have also ruled that these benefits cannot be paid by requiring current employee contributions.[‡] Effectively, these benefits can be cut at the discretion of government managers and state policymakers.

All workers and retirees — including government employees — over 65 are eligible for Medicare, an entitlement program that provides health insurance to the elderly in the United States.

Members and retirees in the state and school retirement system are provided health insurance benefits in retirement both before and after they become eligible for Medicare. These systems pay up to a maximum of 80 percent of the medical insurance premium for pre-Medicare coverage and up to 100 percent of post-Medicare coverage.[49]

Medical care insurance premiums for pre-Medicare retirees in fiscal 2013 cost the state $7,050 per member and double that if a spouse is included in the coverage. Total state costs for post-Medicare insurance premiums ranged from $4,178 to $16,211 per retiree in fiscal 2013, depending on family size and whether those covered are eligible for Medicare.[50]

Local governments are free to offer whatever retiree health benefits they choose, subject to collective bargaining when employees are unionized.

Employer-sponsored health insurance benefits for retirees is rare in the private sector. Of the 24 major Michigan private sector employers surveyed in 2010, only three (13 percent) offered employer-subsidized insurance coverage for retirees.[§] A 2012 national survey of employers by the human resources consulting company Mercer found that only 24 percent of employers with more than 500 employees provide health insurance coverage to pre-Medicare retirees and just 17 percent provided coverage to post-Medicare retirees.[51]


[*]  Because these benefits are not prefunded, they can become a challenging burden when the cost of the insurance coverage and the number of retirees increase faster than an employer’s payroll, from which these benefits are generally funded. According to the Census Bureau, active members in Michigan’s state and local government pension systems is down 126,960 members from 2002 to 2011, a 27.5 percent decline, while the number of retirees is up 104,095 members, a 42.7 percent increase. "Annual Survey of Public Pensions: State & Local Data," (U.S. Census Bureau, 2002), http://goo.gl/KUoeD (accessed May 14, 2013); "Annual Survey of Public Pensions: State & Local Data," (U.S. Census Bureau, 2011), http://goo.gl/qnywS (accessed May 14, 2013).

[†]  State policymakers have begun the attempt to prefund these benefits for public school and state employee plans. By prefunding these benefits, they are setting some money aside that is assumed to grow from investment gains, mitigating some of the demands of the present cost of future benefits. For example, see: "Michigan Public School Employees' Retiree Health Benefits: Annual Actuarial Valuation Report, September 30, 2011," (Gabriel Roeder Smith & Company, 2012), A-2.

[‡]  AFT Michigan v State, 297 Mich App 597 (2012).

[§]  Some employers allowed former employees to continue insurance coverage in retirement, but required these retirees to pay for the full cost of the premium. Richard C. Dreyfuss, "Michigan’s Public-Employee Retirement Benefits: Benchmarking and Managing Benefits and Costs," (Mackinac Center for Public Policy, Oct. 25, 2010), 12, http://goo.gl/ukNPw (accessed Oct. 1, 2013).