When it comes to state government pensions, health is a killer. The most visible face of the pension crisis in New York may be pension obligations reaching into the billions of dollars, but that is only part of the picture. Just as costly are the extremely generous health insurance benefits that accompany those pensions. No one knows how costly, since for years governments in New York and around the country have operated under accounting rules that allowed them to skate by without placing a full price tag on retiree health insurance. Those rules are changing this year, however, so New York taxpayers will finally know how much they’re on the hook for, but even without a precise figure, early estimates are deeply troubling.

One clue to what lies ahead once the accounting is complete is how much the city and state are already spending each year on health coverage for the current crop of retirees – $911 million and $859 million respectively, according to data in a recent New York Times article. The new accounting rules will require governments to account for the expected cost of the benefits they have promised to employees who are still working. That figure could range anywhere between $5 billion and $10 billion in the city alone, according to the Times.

Why? Because state and city leaders can’t seem to avoid offering outrageously generous health insurance promises to government workers. One problem is a structural flaw that plagues the government retirement – unreasonably low retirement ages. As we noted in the earlier editorials in this series, as a rule government employees can retire on a full pension at the ripe young age of 55. Policemen, firefighters, and some sanitation workers can retire at 50. While the federal Medicare program – itself financed in part with taxpayer dollars – helps pick up the tab for government retirees, it doesn’t kick in until the retiree turns 65.

That leaves the state and city paying for full health insurance benefits for retirees during a “gap” of a decade or more before they can pass some of the burden on to unwitting taxpayers in Topeka. The city, which pays 100% of the premiums for both individuals and families of retirees, spent nearly $420 million insuring 74,000 “early retirees” alone in 2004, according to a report by the Citizens Budget Commission. The state, which pays between 90% and 100% of premiums for individuals and between 82% and 86% for families, spent more than $200 million on 32,000 early retirees in the same period. Only 12% of private-sector employers offer coverage for early retirees, according to the CBC.

Even after a retiree reaches the “normal” retirement age of 65, health insurance benefits are still abnormally generous. To obtain Medicare coverage for physician services – known as Part B – participants must pay a premium that covers roughly 25% of the program’s costs, with federal taxpayers paying the rest. But while many private-sector retirees pay the Part B premium, which was about $80 a month in 2005, the city and state pay Part B premiums for their retirees, at a cost to the city of $131 million and to the state of $88 million in 2004, according to the CBC. Among large private companies, 9% pay Part B premiums.

Then there’s insurance for costs Medicare doesn’t cover. Supplementary coverage is fairly common, but it’s less common for the former employer to pick up all of the tab. Yet that is what the city does, for both retirees and their spouses. The bill came to $230 million for 121,000 retirees in 2004. The state pays somewhat less than the full premiums for this cover age, but even then pays 82% for the most “poorly” reimbursed retiree and spouse. Cost? An amazing $463 million for 78,000 retirees in 2004.

The only good thing about these benefits is that they’re slightly easier to bring under control, at least if anyone in Albany ever starts focusing on the problem. Current pension benefits are protected by the state constitution, meaning that the only way to fix the system is to change the rules for new hires, a long-term solution that will only pay off in decades. Retiree health benefits, on the other hand, are not protected, meaning that someone in Albany or City Hall with enough willpower to stare down politically powerful public sector unions could change the rules to bring them more in line with reality. Governor Pataki deserves credit for keeping this escape hatch open – at least three times, most recently last summer, he has vetoed legislation that would have entrenched the benefits.

The private sector has already caught on to the necessity of bringing retiree health coverage under control. General Motors, more a cautionary tale than a model in respect of its old-style pension largesse, recently made waves when it started charging retirees a premium for health coverage. Thanks to Governor Pataki, that is still an option for New York politicians faced with jaw-dropping cost estimates once the new accounting rules are implemented. But real leadership will be needed in Albany and City Hall to take advantage of that opportunity.