Unfunded retiree health care debt surpasses pension liabilities
While costs for post-employment benefits continue to rise, assets set aside to fund these obligations remain low.
By Kristen Smithberg
BenefitsPro
August 14, 2025
Unfunded retiree health care debt is becoming an unsustainable financial burden for state and local governments, as the price tag for Other Post-Employment Benefits (OPEB) grows larger with medical inflation, while assets set aside to pre-fund these obligations remain low.
This is according to a WTW analysis, which found that states and large municipalities collectively reported $789 billion in unfunded OPEB liabilities, exceeding the $753 billion in unfunded pension liabilities, as of 2022. The net liability is expected to increase
“As costs continue to increase, public sector employers are facing budgetary difficulties, credit rating pressure, and default risk,” said WTW. “State and local governments may be forced to cut benefits or pass tax increases on to their constituents to meet these growing obligations.”
Several factors are contributing to the situation, including health care costs that have consistently outpaced general inflation, leading to higher premiums and increased expenses. The report estimates the price of medical care has increased by nearly 126% since 2000, while the price for consumer goods and services is up 90% over the same period.
In addition, costs have skyrocketed for group Medicare Advantage with Prescription Drug (MAPD) plans often offered to public sector retirees due to decreased federal funding and high medical inflation. In a recent WTW survey, group MAPD plan sponsors reported an average premium increase of 31% for 2025, with some plans seeing premium increases of 75% or more.
These elevated costs come at a time when the retiree population is growing and the active workforce supporting their benefits is shrinking.
The report pointed to several challenges public sector employers will likely face due to growing OPEB unfunded obligations. These include strained budgets and difficult decisions about resource allocation, increased taxes, financial volatility, credit rating downgrades, legal challenges, and difficulty recruiting and retaining employees.
One possible solution is a shift to a marketplace delivery platform whereby employers provide retirees with Health Reimbursement Arrangements (HRAs) that they can use to purchase individual health care coverage, said the report. Such a shift would reduce plan sponsor cost and risk, preserve retiree benefits and create a long-term sustainable cost for employers, it said.
The report noted transitioning to the individual marketplace potentially would reduce or eliminate layers of time-consuming administrative activities, including carrier negotiations, medical claim audits, annual open enrollment, plan design and fiduciary oversight. For retirees, individual marketplace adoption may lead to lower premiums and out-of-pocket costs.
Source: