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Pension reform poses difficult financial question for state retirees

Updated: May 3, 2013 12:15PM

Despite the impasse in Springfield, pension reform will come, and when it does state employees will be asked to make a very tough choice: Should they forego the 3 percent annual compound inflation adjustment in the pension benefit? Or should they keep the inflation protection and give up retiree medical benefits?

Teachers don’t have Medicare and Social Security as a fallback position, although other state employees do get those benefits. Even so, if you retire early as many state employees do, what do you do for health insurance until age 65 without the state plan?

The health insurance plan for state employees is far more generous than most private plans. After 20 years of service, it is free. And even those who retire with less service will pay only about half the premium costs. Plus, the state program allows retirees to pick their health care providers almost without restrictions. No wonder this is viewed as a valuable — and costly — benefit.

But how do pensioners deal with inflation if the monthly check doesn’t keep up? Over the past 70 years, inflation in consumer prices has averaged 3 percent annually.

Even at “only” 3 percent annual inflation, the value of your money is cut in half in just 25 years. That is, if you retire today at age 65 with a monthly pension check of $2,500, it will take $5,000 a month to buy the same goods and services if you live to age 90.

If our federal government resorts to “printing” more money to pay off our debts, inflation could soar. Even at only moderate inflation rates, it’s important to protect your retirement income against the loss of buying power. Historically, a diverse portfolio of stocks, with dividends reinvested, has beat inflation in every 20-year period.

But without insurance, it’s impossible to protect against the potentially devastating costs of a medical situation. And even ordinary medical costs have been rising far faster than the Consumer Price Index.

The rising cost and unpredictability of need mean that retirees must opt for the protection against the greatest risk. Health insurance is potentially the more valuable benefit — if you need it.

And that leaves only one more question: If you choose the health insurance over the inflation protection, who’s to say the state won’t renege on parts of this promise, too?

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