When inability to predict the future is an excuse for promising lifetime benefits.
I was in need of a chuckle, this evening, so I was well rewarded by reading Tom Sgouros’s recent post on RIFuture titled “The Manufactured OPEB Crisis.” For expediency’s sake, you could just skip to the end to get to the point… predictably, that fair-minded, thinking people wouldn’t dream of trying to get Rhode Island’s governments out of the business of guaranteeing lifetime benefits for employees in an unpredictable world.
But getting there is all the fun, and Tom gets there by highlighting a single assumption of the actuaries — namely, healthcare inflation rates, which (he points out) are assumed to be significantly higher than regular inflation rates. I’ll offer two quick points by way of explaining the humor that I found in the post.
The first is that it’s a bit of a showman’s trick to tease out a single one of the assumptions about future healthcare costs. Somewhat randomly, I’ve plucked a 2011 report about Coventry’s other post-employment benefit (OPEB) from this list, mainly because it lays out some of the assumptions in easy-to-understand ways.
Coventry assumes that medical inflation rates will fade from 5.8%, now, to 4.4% over the next half-century. If that turns out to be high, despite the Federal Reserve’s money printing and any other economic exigency of the next fifty years, then (yes) costs will be lower. Of course, Coventry also assumes that the average employee not on a Medicare track will live to age 88. If even the modestly optimistic predictions about medical technology prove to be true, then that would be too young, which means the costs would be higher.
Yes, some of the retirees will not be required to join Medicare when they’re eligible. (That’s one of the things that Sgouros might call “negotiating these benefits out of contracts.” And, for that matter, the actuaries tend to assume that the federal government will not adjust the Medicare eligibility age to deal with its own fiscal woes… ever.
Then there are the financial questions. Coventry assumes a 4% discount rate (representing, basically, the annual increase of its fund’s value absent contributions), which is pretty modest. Other cities and towns are less prudent. (Isn’t it telling that the investment returns on most of these funds are so much more reasonable than on pension debts, which would be downright terrifying if calculated at 4% discount rates?)
Maybe more importantly, Sgouros glosses over the fact that RI governments haven’t just failed to put enough money aside for these promises. A majority haven’t put aside a penny, which means they’ve got a long way to go to catch up, whatever the assumptions.
The second, even more-laughable, argument from Sgouros is this:
I cannot predict the future, so I don’t know how exactly it will happen, but I am quite confident that 50 years from now health care costs will not be 12 times what they are today. …
These are not sustainable increases. I do not have to know how or when these increases will be reined in, but only observe that they are not feasible to know that they will be reined in somehow.
Put differently: Don’t worry; somebody will stop the out-of-control train from wrecking! Or rather: Ignore this disaster until it’s too late to resolve it by admitting that people who cannot predict the future should not be guaranteeing pensions and benefits to infinity and beyond.