According to The Boomer Project there are more Boomers than any other segment of the population.
Boomers are turning 50 years old at the rate of 10,000 a day and starting in 2006, the first Boomers will start celebrating their 60th birthdays. There is no looking back.
On December 20th BusinessWeek Online wrote about America's Other Pension Problem. Companies' financial obligations to retiring workers -- in the form of pensions -- have come into the spotlight recently. And despite concern that the pension plans of many companies suffer from underfunding, Americans can take some comfort in the fact that pension funding is regulated by the government and financial accounting oversight bodies.
But another, lesser-known obligation may pose an even bigger problem for Corporate America -- funding shortfalls for post-retirement health plans. Other post employment benefits (OPEB), as these benefits are known, are receiving greater attention from lawmakers and regulators. On Nov. 10, 2005, the Financial Accounting Standards Board (FASB) unanimously voted to add pension and OPEB treatment to its agenda. OPEB obligations consist mostly of medical costs paid to insurance companies (or special accounts for the self-insured) and pharmaceutical outfits for the benefit of retired workers. These benefits may be contractual or implied, and usually require retiree contributions in the form of monthly premiums and direct co-payments for services and products rendered.
Unlike with pensions, which are regulated, companies have no legal requirement to create a trust entity to fund the current or future OPEB costs. Additionally, specific tax treatments and credits set up to encourage pension funding do not exist for OPEB funds. For these reasons many companies have not created trust accounts to fund their OPEB obligations, and those that have done so fund them to significantly lower levels than required under current pension funding rules.
Pensions, while underfunded, have 88.3% of their obligations set aside in pension trusts, compared to 21.7% for OPEB obligations. The result: The underfunded OPEB liability of companies in the S&P 500 is significantly larger than the pension underfunding.
For the 337 companies in the S&P 500 that offer OPEB, only 282 provided sufficient information for estimates. Those 282 had OPEB assets of $82.2 billion and OPEB obligations of $379 billion, resulting in an underfunding balance of $292.2 billion.
A fundamental difference between pensions and OPEB are that pensions have required funding and the Pension Benefit Guaranty Corp. (PBGC) behind them, while OPEB have no such requirement or quasi-government backing.
Another dissimilarity: Over the last two years, additional disclosures for pensions have been added to assist investors in evaluations, while similar disclosure has not been enacted for OPEB. The underfunding of both pensions and OPEB stems from a combination of low interest rates and specific accounting methodologies designed to smooth out market volatility. Pensions and OPEB, like debts, must be paid if a company is to remain credible. Their obligations are imperative in analyzing and evaluating ongoing concerns. The FASB initiative's first step, expected to take about one year, will add the net pension and OPEB status to the balance sheet. The second would actually change the methodology of pensions and OPEB, and that will likely take at least three years.
Local Healthcare Problems The International Herald Tribune is writing about the healthcare retirement time bomb.
Since 1983, the city of Duluth, Minn., has been promising free lifetime health care to all of its retired workers, their spouses and their children up to age 26. No one really knew how much it would cost. Three years ago, the city decided to find out. It took an actuary about three months to identify all the past and current city workers who qualified for the benefits.
She tallied their data by age, sex, previous insurance claims and other factors. Then she estimated how much it would cost to provide free lifetime care to such a group. The total came to about $178 million, or more than double the city's operating budget. And the bill was growing.
Mayor Herb Bergson was more direct. "We can't pay for it," he said in a recent interview. "The city isn't going to function because it's just going to be in the health care business."
Duluth's doleful discovery is about to be repeated across the country. Thousands of government bodies, including states, cities, towns, school districts and water authorities, are in for the same kind of shock in the next year or so. For years, governments have been promising generous medical benefits to millions of schoolteachers, firefighters and other employees when they retire, yet experts say that virtually none of these governments have kept track of the mounting price tag. The usual practice is to budget for health care a year at a time, and to leave the rest for the future.
Off the government balance sheets - out of sight and out of mind - those obligations have been ballooning as health care costs have spiraled and as the baby-boom generation has approached retirement. And now the accounting rulemaker for the public sector, the Governmental Accounting Standards Board, says it is time for every government to do what Duluth has done: to come to grips with the total value of its promises, and to report it to their taxpayers and bondholders.
"It's not going to be pretty, and it's not the fault of the workers," said Mayor Bergson, himself a former police officer from Duluth's sister city of Superior, Wis. "The people here who've retired did earn their benefits."
The new accounting rule is to be phased in over three years, with all 50 states and hundreds of large cities and counties required to comply first. Those governments are beginning to do the necessary research to determine the current costs and the future obligations of their longstanding promises to help pay for retirees' health care. Local health plans vary widely and have to be analyzed one by one.
No one is sure what the total will be, only that it will be big. Stephen T. McElhaney, an actuary and principal at Mercer Human Resources, a benefits consulting firm that advises states and local governments, estimated that the national total could be $1 trillion. "This is a huge liability," said Jan Lazar, an independent benefits consultant in Lansing, Mich. "If anybody understands it, they'll freak out."