Long Term, Health Spending on State and Local Government Workers Outpaces Medicaid

In a previous post I reported that health benefits for government workers cost 40 percent more than benefits for private-sector workers. This extra cost imposes a significant burden on taxpayers. Researchers at the Pew Charitable Trusts have now answered another, related question: How does spending on health benefits for state and local government workers compare with spending on Medicaid?

In a recent report, the researchers conclude that state and local spending on government workers increased by 444 percent in real, inflation-adjusted terms from 1987 through 2012. Spending on Medicaid grew by 375 percent.

That is, spending on government workers increased almost 20 percent more than spending on Medicaid. Free-market reformers continuously promote the idea of getting people off Medicaid, which is a bloated welfare program. However, we should be increasingly concerned with spending on government workers.

According to the report, state Medicaid spending accounted for $188.8 billion in 2012, whereas spending on government workers’ health benefits was $163.9 billion. If the different relative rates of growth persist, it will still take twenty years for spending on government workers to exceed Medicaid spending. Nevertheless, the trend is extremely worrisome.

How do government workers get away with it? Because health benefits are a defined benefit, rather than a defined contribution, their future costs are not properly reflected in the current fiscal year’s cashflow.

In recent years, employers have moved toward defined-contribution health benefits (especially through private exchanges). It is likely far more important for taxpayers to insist that state and local government workers be transferred to defined-contribution plans.