States and localities have $1.4 trillion in unfunded promises of retiree health benefits, according to an October 2006 report from the Cato Institute.

Cato studied 16 states and 11 localities, finding that they had an average unfunded health cost of $135,313 per worker. Projecting this out to all public employees who are to have employer-provided retiree coverage, the group reached its $1.4 trillion total. This, it noted, is on top of $700 billion in pension underfunding.

Cato, a libertarian think tank, recommended that governments should "cut excess retirement benefits" and "convert traditional pension and retiree health plans into individual savings-based systems so that workers prefund their own retirements." This recommendation to move to a defined contribution approach to retirement is a popular one among conservatives and libertarians. Advocates of defined benefits counter that most individuals would be unable to get the level of benefits in a defined contribution model that they now receive and that claims of underfunding are misleading since long-term actuarial projections for public programs change over time.

• Unfunded State and Local Health Costs: $1.4 Trillion