Question

What is your view on this? Please see below. No internet sources.

In terms of a letter that turned GASB around, there were several letters in response to the Exposure Draft that ultimately became Statement 45 on other postemployment benefits (OPEB). They were mostly from actuaries who argued that the Board had made a mistake in not including the "implicit rate subsidy" as part of the measurement of the OPEB liability. The implicit rate subsidy is a situation in which a government does not pay for a retiree's health insurance directly but allows retirees to purchase health insurance in the same pool as the government's active employees. This saves the retirees a lot of money because, as you know, health insurance is more expensive for older individuals.

Answer 1

implicit rate of subsidy is a part of measurement of OPEB laibility. The OPEB obligation normally includes the cost of the implicit rate subsidy for the years in which the retiree is paying the active employee insurance costs for continued coverage. implicit rate subsidy in IPEB means that ,

It is a common practice for employers to permit retired employees to continue in the employer’s group health insurance plan by paying the group premium charged to active employees once
eligibility for employer paid benefits is exhausted. This practice creates an OPEB
liability based on the theory that retirees have higher utilization of health care benefits
than active employees. Unless the premium rate for retirees is set to fully recover their
health costs, the premium for active employees is implicitly overstated to subsidize
utilization by retirees. Similarly, unless the premium rate for retirees is set to fully
recover their health costs, the premium for retirees is understated. This difference creates
an implicit rate subsidy.

The examples illustrate the implicit subsidy contributions for an employer with two retirees ages
57 and 62. The average age of the covered employees is 40. The active employee monthly
premium is $500.

1. Employer pays 100 percent of premium for active employees
a. For a retiree age 57, the claim cost is 1.04^17 = 195 percent of the age 40
premium.
b. For a retiree age 62, the claim cost is 1.04^22 = 237 percent of the age 40
premium.
c. Claim costs expected for 2 retirees = 12 x 500 x (1.95 + 2.37) = $25,920
d. Premiums paid by employer for 2 retirees = 12 x 500 x 2 = $12,000
e. Implicit subsidy contribution for 2 retirees = $25,920 - $12,000 = $13,920

2. Employer pays 60 percent of premium for active employees (and retirees also covered
under the active group health plan)
a. Premiums paid by employer for 2 retirees = $12,000 x 60 percent = $7,200
b. Premiums paid by 2 retirees = $12,000 x 40 percent = $4,800
c. Implicit subsidy contribution for 2 retirees = ($25,920 x 60 percent) - $7,200 =
$8,352

this is benefit to retired employees.