When we began our careers, the last thing on our minds was our retirements. While most of us have adequate pensions that we can rely on to cover our financial needs in our later years, many of us have not considered our medical needs after retirement. Medical expenses are significant and have been increasing at a considerable rate. Over the last 10 years, the cost of the average employer-sponsored family medical plan has increased by 55%. In 2018, the cost of the average employer-sponsored family medical plan in the United States was nearly $20,000 a year. Rates in California are even higher. In my city, the cost of family medical, dental and vision is nearly $27,000 a year.
Some of us have negotiated employer-paid retiree medical benefits to offset some of our medical premium expenses in retirement. For those who have employer-paid retiree medical contributions, often these contributions fall well short of the expense and fail to keep up with the growth of rates. Additionally, the trend has been for cities and counties to phase out these contributions. In many cases, the burden of covering medical expenses in retirement will fall on the retiree. Those who have not made plans to cover these costs will be forced to reduce their living standards by covering the expenses out of their retirement income.
There are many options active employees have to ensure their medical costs are covered in retirement. Employee groups can continue to attempt to increase and preserve employer-paid retiree medical benefits. In most cases, municipalities and counties classify these types of benefits as unfunded liabilities that affect their credit standing, and therefore local governments attempt to avoid offering these types of benefits. This is why many local governments have been working to phase out medical contributions to retirees. In many cases, retiree medical benefits are not vested and have to be renegotiated in each subsequent labor agreement, which makes the benefit unreliable.
The most secure method to ensure medical security in retirement is to pre-fund a vested benefit during your years as an active employee. There are two types of benefits: defined contributions and defined benefit plans. In a defined contribution plan, an employee and/or their employer make contributions to a retiree medical account. Upon retirement, the employee can use the accrued balance of the account to cover medical expenses during retirement, but once the account is depleted, there is no further benefit. In a defined benefit plan, an employee and/or their employer make contributions to a medical trust or similar entity. Upon retirement, the trust provides a monthly benefit for the life of the retiree. The benefit is based on the monthly contribution level and the length of time the contribution was made during the employee’s career. While both benefit systems provide a retiree with medical coverage in retirement, a defined benefit plan provides lasting security and guarantees a lifetime benefit level for employees.
PORAC established the Retiree Medical Trust (RMT) for PORAC member associations as an important vehicle to ensure medical security for association members in their retirement. While the Trust is the newest of PORAC’s three trusts, it is the fastest-growing. At PORAC’s 2019 Conference of Members, bylaw changes were made to allow associations throughout the nation to join the PORAC RMT, allowing the Trust to continue to expand, which creates even more stability in the plan. The PORAC RMT functions as a tax-free vehicle for employees or employers to make contributions for an employee’s retirement medical needs. Employees earn “units” based on their level and number of monthly contributions during their career, and the units translate into a monthly benefit in retirement.
Under federal law, participation in the PORAC RMT must be through a labor agreement between an association and their employer and must include all members of a bargaining group. If you are approaching labor negotiations, I would encourage you to investigate the PORAC RMT and see for yourself the quality of the benefit offered. Associations should ensure that their members’ retirement medical needs are addressed, and the PORAC RMT offers a simple way of accomplishing those needs.
For more information about the PORAC RMT, visit poracrmt.org.