For decades, public sector employers have offered generous retiree healthcare benefits. Typically, these rich benefits have been delivered through “group” plans that offer benefits exclusively to the retirees of a single employer. The long-term price tag of these benefits, called Other Post-Employment Benefits (OPEB), continues to grow larger as medical inflation increases plan costs and the population ages. At the same time, the level of assets set aside to pre-fund these obligations remains very low. In 2022, states and large municipalities collectively reported $789 billion in unfunded OPEB liabilities.[1] More recent data is likely to be available in late 2025 to early 2026, but the net liability is expected to increase.
This level of unfunded retiree healthcare debt is becoming an unsustainable financial burden for state and local governments. As costs continue to increase, public sector employers are facing budgetary difficulties, credit rating pressure, and default risk. State and local governments may be forced to cut benefits or pass tax increases on to their constituents to meet these growing obligations.[2]
However, a viable solution already exists. It’s one that private sector employers have used to their advantage for over 20 years: the individual marketplace. The individual marketplace leverages the greater population to provide high quality benefits at lower costs. Employers provide retirees with Health Reimbursement Arrangements (HRAs) to purchase affordable and customized individual healthcare coverage. This shift to a marketplace delivery platform can immediately reduce plan sponsor costs and risk, thereby preserving retirees’ benefits and creating a long-term sustainable cost for the employer.
