Raising the Medicare retirement age and unions

By email, Paul Van de Water raised a very good point about how raising the Medicare retirement age would affect certain union health benefits. Apparently–and I did not know about this–many steel and auto workers’ health benefits are funded by VEBAs. See the problem?

I’m joking. This requires more explanation.

A VEBA is a voluntary employees’ beneficiary association. The way they work is that an employer  puts a big chunk of money into a trust, to be managed by a VEBA, and that money funds health benefits. In doing so, the employer has off-loaded all its responsibility for retiree health benefits.

Phyllis Borzi (pdf) highlights the key tension:

On the one hand, VEBAs offer retirees a dedicated source of funding for future medical benefits, so receipt of benefits is no longer entirely contingent on their employer’s continued existence, financial health and good will. On the other hand, VEBAs do not guarantee that promised benefits will be fully funded since the existence and affordability of benefits in the future is limited to what the assets in the VEBA will ultimately support. Moreover, to the extent that employer stock has been contributed to the VEBA instead of or in addition to cash (as is being currently proposed for the auto industry VEBAs), in the current troubled economic climate, the VEBA’s asset base may be even less secure than originally projected.

Now, what has raising the Medicare retirement age got to do with VEBAs? Well, if retirees of firms that have already dedicated fixed funds or assets for benefits have to wait two additional years for Medicare, those fixed funds or assets have to stretch further than anyone anticipated. Thus, those whose benefits are tied to VEBAs are disproportionately disadvantages by an increase in the Medicare age. Their benefits will be cut to make room for the additional spending necessary to carry folks two more years.

Remember, we’re talking unionized steel and auto workers. A lot of them.* Need I say more?

* I’m told that only the federal government and, possibly, some large state plans cover more people than do some big VEBAs.

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