A Minute With...

Richard L. Kaplan, expert on taxation and retirement

5/18/2012  12:00 pm

Richard L. Kaplan, an expert on taxation and retirement issues, spoke with News Bureau Business and Law editor Phil Ciciora about the controversial bill headed to Gov. Pat Quinn’s desk that requires retired state of Illinois employees to begin paying premiums for their health insurance on July 1.

Do health benefits for retired state of Illinois workers have constitutional protection, like pensions?

image of professor richard kaplanNo. The provision in the Illinois Constitution that protects pensions doesn’t apply to retiree health insurance, which is probably why the state Legislature decided to substantially change this benefit. The Legislature can pretty much do whatever it wants regarding retiree health benefits.

Undoubtedly, many current employees and retirees will regard this legislation as unfair because they had been counting on those benefits in planning their retirement, but unfairness alone does not make legislation unconstitutional.

From the state’s perspective, it is understandable why these benefits were targeted. Health care is a huge unfunded obligation. Illinois is a pay-as-you-go state, meaning that the cost of retiree health benefits comes out of the current budget. Unlike pension payments, there’s no health insurance “trust fund” to tap.

Plus, people are living longer and they will incur more health care costs. Every prediction is that the cost of health care will continue to increase more than inflation generally, and no one knows what kind of health care will be available five, 10 or 20 years from now.

Do you foresee a court challenge?

The new law might be challenged in court, but altering health benefits for retirees is something the private sector has been doing for the past 20 years with impunity. An article I published in 2009 titled “Retirees at Risk: The Precarious Promise of Post-Employment Health Benefits” examined the results of those court cases. But the bottom line is that courts are unlikely to provide any relief on this issue.

Is Illinois unique in providing health insurance to retired state workers?

Not at all. Ninety-two percent of states have some form of retiree health insurance for state workers. Some plans are more generous than others. What is unique about Illinois, however, is that the major change takes effect in less than six weeks, on July 1, 2012, and there are no real details available yet.

The law confers a lot of power on Central Management Services, which will ultimately decide how premiums are calibrated. Will they be based on years of service or income, or some combination of the two? We really don’t know. Most states that have differential contributions base those differentials on years of service. Virtually none of them differentiate retiree health benefits according to a person’s income, but CMS has largely unfettered discretion under this legislation to design whatever arrangement it deems appropriate.

For example, CMS has indicated that it will stratify premiums by seven tiers of income, but CMS has not indicated how compressed those tiers will be. In any case, the new law does not require income tiers or provide what measure of income should be used in determining premiums.

Furthermore, there are no guarantees that the plan you will see for this coming fiscal year will be the plan the following year.  In other words, CMS could revise the plan next year to make it less generous.

So there’s a great deal of uncertainty now, and there will be uncertainty in the future as well.

This will undoubtedly have a big impact on state workers’ plans to retire. What should state workers who are not eligible for Medicare – either because they’re not 65 years old yet, or they are not part of the Medicare system – do?

Everyone’s situation is different, so generalized advice is not really possible. Some current employees may decide to postpone retirement. Others may choose to work elsewhere to get enough work credits to qualify for Medicare.

Keep in mind that people who began working for the state of Illinois after March 31, 1986, have been part of the Medicare system from the start of their employment. People who started working for the state before that date, however, are not part of the Medicare system. So even when they reach age 65, they won’t be able to access Medicare, unless they have a spouse who is eligible or had enough work credits from previous employment that was part of the Medicare system.

Depending upon whatever premium structure is ultimately devised, some pre-65 retirees may want to obtain health insurance via the state-run health insurance exchanges created by the Patient Protection and Affordable Care Act beginning in 2014, assuming that the Supreme Court doesn’t rule it unconstitutional. In fact, some people might even qualify for a federal subsidy to buy health insurance through those exchanges.

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