Retirement Matters

June 2022

Count your blessings, including the improved pre-funding trends for pensions and health benefits; the solvency of Social Security and Medicare; and a lower Medicare Premium.

Retirement Board Meets — The State of Michigan Retirement Board (SMRB) provides oversight of the State Employees’ Retirement System (SERS) defined benefit plan. The board met on May 12, 2022, to review two separate reports. The first report evaluated the pre-payments of pensions and was prepared by the State of Michigan Investment Board. The second report assessed the pre-funding of health care benefits and was prepared by Gabriel, Roeder, Smith & Company (GRS).

Pension Pre-Funding — The fund-ratio shows how much of the State employee pension costs are fully paid up. This indicator gauges the health of a defined benefit pension plan and whether the fund has enough to pay out pensions. It’s measured by the pension plan’s assets as a percent of liabilities on an actuarial basis. The “fund ratio” for SERS pensions was 65.4 percent for 2019, and hasn’t been revised since last year’s report. Michigan’s fund ratio has consistently hovered around 65 percent since 2015. Like most states, Michigan has not completely funded the public pension systems, but is making gains in that direction. The value of assets has benefited from significant long-term investment growth at pre-pandemic levels.

Liquidity — According to the SMRB, in early 2020, the U. S. economy fell into the sharpest recession on record, followed by the fastest-ever rebound. Most of the economy recovered in 2021, given the unparalleled federal stimulus. With new concerns about the global economy, our pension fund investors plan to maintain a long-term focus on keeping enough liquidity, or assets that can easily be converted into cash in a short time, to pay pensions as short-term markets fluctuate.

Health Benefit Funding — Unlike Michigan’s state employee pension, the pre-payment for their health care only started in 2013, even though the cost has been estimated since 1999. By comparison, most U. S. pension plans have not pre-funded health care benefits. Plan costs increase as more pension members retire and health care inflation rates exceed that of regular inflation. Health benefit costs could exceed the current estimate as they do not include unexpected trends such as Medicare funding reductions or cost shifts, unexpected new benefit members, medical inflation worse than now, or lower than expected investment returns.

Progress Made — The purpose of estimating the SERS health benefit cost associated with pensions is to measure the progress of the retiree health care plan pre-funding. In addition, an estimate is needed for the employer contribution for fiscal year 2024. By 2021, the funding had reached 57.4 percent for health benefit pre-payments based on an estimate including more factors than the trend line. While pre-funding of retiree health benefits has only existed since 2013, or for nine years, this shows the significant progress that has been made in approaching the pre-funding for pensions of 65.4 percent in 2019. Pension pre-funding percent was just above the 57.4 percent in 2021 for health benefit pre-funding. This percentage has grown as annual contributions have exceeded expenses. For fiscal 2021, employer’s expenditures for retiree health care benefits were $308.1 million while employer contributions were $774.4 million, or more than double the expenses. Employees and other government agencies also contribute to the fund, but at a lower rate than employers.

Further, policy changes have enhanced health care prefunding investment through the Dedicated Gains Policy. Starting with the September 30, 2021, funding valuations, the investment return assumption can’t be lower than 6 percent.

Improved Solvency — In general, the Medicare and Social Security Trust Funds aren’t likely to run short of funds as early as once feared. Their financial outlook has improved slightly due to a stronger and faster economic recovery than predicted in 2021. Despite this good news, both programs still face future insolvency, according to a recent Social Security Administration report. For more information, search the “Trustee Report Summary – Social Security.”

Social Security Trust Funds (SSTF) — These funds are the combined asset reserves of the Old-Age and Survivors Insurance and Disability Insurance (OASI & DI). They are projected to become depleted in 2035, one year later than projected last year. Social Security pays benefits to more than 65 million Americans, including retirees, the disabled, and survivors of deceased workers.

Medicare Trust Fund — This fund pays hospital bills for seniors and those with disabilities, and is not expected to be able to pay full benefits starting in 2028. But that’s an improvement of two years later than was estimated last year or 2026. Income for Medicare’s hospital insurance fund is projected to be higher than estimates from last year because the number of covered workers who help fund it and their average wages are both expected to increase. An aging population, plus extended longevity, has increased the financial pressure on Medicare. Even so, Congress has failed to take action to improve its financing. Medicare covers about 64 million older and disabled people.

Benefits Continue — It’s important to note that the insolvency, or depletion of these trust funds, doesn’t mean the programs will no longer pay benefits. But retirees would receive lower benefits than they expected. If the SSTF is depleted in 2035, then the government can still pay an estimated 80 percent of the usual benefits. If the Medicare Trust Fund for inpatient care is depleted, then it could still pay an estimated 90 percent of expected costs in 2028. The improved projection for Medicare’s insolvency from 2026 to 2028 means that Congress has a little more time to act on solutions and to phase in changes gradually over time. They have more time but where is the urgency to act?

Lower Medicare Premium — The Centers for Medicare & Medicaid Services (CMS) recommended changing the 2023 Part B standard premium to reflect the overestimation of the cost of covering the Alzheimer’s treatment Aduhelm. The Part B premium increased from $148.50 in 2021 to $170.10 in 2022 where it was expected to remain stable.

Editor’s note: Joanne Bump serves as feature columnist for “Retirement Matters.” Column content is time sensitive and is based on information as of 5/8/2022. Joanne can be contacted by e-mail at joannebump@gmail.com.

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