Benefit Trends: Change Is Now Constant

To set the backdrop for the forces at work today in employee benefits, consider this statement by a president of one firm listed in the Dow Jones Industrial Average. In a recent PBS interview, he said, "We no longer view ourselves as an American company; we act as a global company in all of our decision-making."

Executives of two other DJIA firms recently pointed out in presentations that "less than half of our workforce is now in the United States -- but 95 percent of our health care costs are."

To set the backdrop for the forces at work today in employee benefits, consider this statement by a president of one firm listed in the Dow Jones Industrial Average. In a recent PBS interview, he said, "We no longer view ourselves as an American company; we act as a global company in all of our decision-making."

Executives of two other DJIA firms recently pointed out in presentations that "less than half of our workforce is now in the United States -- but 95 percent of our health care costs are."

These large corporations and other S&P 500 companies have been at the vanguard of changes in health insurance and retirement programs since at least World War II, and they are still plowing new ground today. Recent developments include the shift from traditional defined benefit pensions to 401(k)-type retirement plans, and the growth of new consumer-focused health plans as a way to control health-benefit costs. The largest employers in the private sector essentially set the ground rules for the role that benefits will play in the "total rewards" packages (salary and benefits) of all employers in the nation.

Put another way, firms that now account for less than 15 percent of all employment set the tone for all other employers that offer benefits. These are firms whose new workforce growth comes from outside the United States, not within. Thus, total compensation costs and tax/social benefit structures outside the United States play an increasingly dominant role in the benefits that American workers receive.

There is no reason whatever to believe this influence by multinational employers will change in the decades ahead. The globalization of business and benefits, along with various other trends, has major implications for managers in the private sector and government, as well as workers and their families.

Global Events Shape Domestic Trends
We are now fully into an age when events outside the U.S. labor market and economy are the primary driver of benefit and compensation trends within our borders.

For instance, the campaign debate over the North American Free Trade Agreement (NAFTA) and free trade in general is in part about requiring other nations to spend more on total worker rewards. This would allow the United States to maintain more valuable benefits, rather than continue the current declining trend. To the extent that effort fails, the decline in U.S. benefits is almost certain to persist.

It's been said there's no turning back the clock on globalization, even if we wanted to. That's true for several reasons of our own making:

• Most of the U.S. manufacturing base is now gone.
• We depend to a perilous extent on energy from other nations.
• We depend to an even more dangerous extent on other nations to finance our ever-growing national debt.
• Major American employers now depend on overseas hiring to fill their technical and specialized talent needs because of limitations of the U.S. educational system and its graduates; domestic security and immigration restrictions; the pace of technological innovation; and today's fully wired/wireless/24-7 business world. Put another way, there are not enough qualified Americans to meet the demand for skilled workers in a knowledge-based economy, even among American employers.

America: Going Its Own Way
The central difference between the United States and other nations when it comes to health, retirement and welfare benefits is the relative role of institutions (in both the public and private sectors) versus individuals.

Nearly every other developed nation relies upon some form of national health insurance and social security to meet individual health and retirement needs. As a result, tax levels in most of these nations (European countries being the prime example) are far higher than in the United States. Among the other major differences between these two approaches:

• These foreign public programs have constrained health care spending to levels that are less than half of those here in the United States, through aggressive regulation of health technology and utilization.
• These foreign retirement programs have generally promised and provided much higher social security benefit levels than the United States because they never sought to develop private pension systems, which in this country are intended to fill the gap for all but the lowest-income workers when they reach retirement.
• Research in other developed nations shows a strong general public commitment to "community" obligations, as opposed to the general desire for "individual choice and control with a safety net" that continues to be dominant in the United States.

This has led to some inherent contradictions in the way Americans view their health care system. Even as public demand grows for universal health coverage, most Americans say they still want their employer involved in their health benefits. Most surveys also find that employers prefer their continued involvement over a government takeover of health insurance, despite the ever-growing costs and complexity. Whether it be the American worker or employer, control is something that almost everyone continues to cherish.

Live For Today, Trouble for Tomorrow
Regardless of how workers get their benefits, a major obstacle to retirement security in America is the way individuals have embraced the constant call to spend and borrow. We are indeed a credit nation: Consumer purchases -- which is to say living for the moment and using plastic or home equity credit to do it -- have been the driver of U.S. economic growth for decades. In the view of some, the politics of fear in the wake of 9/11 have only reinforced the ability to rationalize debt-based gratification over savings and delayed consumption, both on individual and government levels.

With the United States now in what some are labeling a recession and home prices declining, it's obvious why so many Americans find themselves in trouble. EBRI's most recent Retirement Confidence Survey found that 22 percent of workers and 28 percent of retirees report they have no savings of any kind. Almost half report total savings and investments of less than $50,000. With so many people not saving and easy credit gone, it's no surprise that Americans now say they are suddenly deeply worried about retirement.

In this environment, one particularly controversial new financial product is the so-called "401(k) debit card," which allows instant loan access to your "retirement savings." Researchers have always been concerned about leakage in the retirement system -- money that workers pull out of their retirement plan for consumer purchases or other non-retirement purposes. This new and easy access to instant gratification may only make some Americans' retirement prospects even worse.

One attitude that employers say they are concerned about is the sharp decline in institutional trust among workers -- whether it be trust of their employer, corporations in general, or (especially) government. Although conventional wisdom says American workers today are far more mobile and job turnover is far higher than in the past, research shows this is not true: The American workplace has always been extremely mobile, and turnover rates today are not much different than "the good old days" of the supposedly calm 1950s.

Workers still report higher levels of trust in their employer than in most other institutions, and in today's technological, skill-based economy, employee benefits (especially health benefits) still remain a crucial factor in recruitment and retention of talented and valuable workers.

New Models in Retirement Benefits
As America has shifted from the traditional defined benefit pension, we're seeing a move towards these models.
Defined Benefit/Defined Contribution Trends -- As is well-documented, private-sector employers started moving away from traditional defined-benefit (DB) pension plans decades ago, and toward the defined-contribution (DC) retirement plan model, typified by the 401(k). In 1979, 62 percent of workers in a retirement plan participated only in a DB pension; by 2005, 63 percent participated only in a 401(k) plan. Concurrent with the regulatory and financial pressures that drove the decline in DB pensions has been a sharp drop in employer-paid retiree health insurance. Most public employers are holding on to DB plans and supplementing them with DC.

Hybrid Plans -- The private-employer movement toward hybrid defined-benefit design began in 1984, when Bank of America introduced the first such plan. Another milestone came just this year, with IBM moving all of its workers to enhanced 401(k) plans for all future service. This trend is likely to continue in the decades ahead. The old final-average-pay, life-annuity, employer-paid pension is pretty much gone as a model for the private sector, forced out by global and domestic economic fundamentals; federal pension laws; new accounting standards from private and international accounting boards; worker distrust of institutional commitments; and other factors.

Automated 401(k) -- Much has been written about the recent Pension Protection Act's enhancements for 401(k) plans, such as auto-enrollment, default auto-contribution and auto-investment, and investment advice for more participants. But none of these features provide the primary values of old-style defined-benefit pension plans: protection against pre-retirement inflation risk, investment risk and longevity risk. Nor are they are likely to address these issues in the future for most workers, even as more employers make it easier for 401(k) participants to move their funds into well-priced accumulation and life income annuities.

The Shift in Health Benefits
As with retirement programs, we're seeing movement toward these new systems of coverage.
Employment-based coverage -- Despite conventional wisdom that employers are bailing out on health benefits, the facts show otherwise: Offer rates for active workers have been amazingly steady, ranging from 73 - 78 percent of the work force for decades. However, the type of insurance has changed dramatically. Policies that pay everything are essentially gone, replaced by designs of many names that are rife with employee premiums, deductibles, co-pays, and limitations on covered services.

Complexity and experimentation in design continue to evolve as electronic records are introduced; more research is conducted on medical effectiveness and results are built into both treatment and payment structures; and value-based designs are tested. Workers feel increasing cost pain, even though they have progressively paid less of the total health bill. Employers continue to find that health benefits are central to worker recruitment and retention. All this can be expected to continue unless and until the government acts to remove employers from the provision of health insurance.

Retiree health coverage -- In the private sector, health care for retirees has been in a downward trend ever since accounting rules changes made by FASB in the 1980s. Government employers will at least consider the same path, now that GASB is implementing a similar accounting rule for the public sector.

That means the government and individuals will be the ones to pay for retiree health insurance in the decades ahead. Big employers are likely to facilitate value purchasing of retiree health coverage by older workers before they are eligible for Medicare, as they lobby Congress to allow younger retirees to "buy-in" to Medicare.

Consumer-focused health care -- The movement that began in 1978 towards consumer-focused health plans is likely to continue, with ongoing refinements regarding payment for wellness and preventive care, chronic disease and prescription drugs. However, insurers -- not insured individuals -- are likely to continue to hold the risk of unexpected catastrophic costs. In this way, the movement that has been seen in retirement plans (shifting catastrophic risk to the worker) is not likely to be repeated in the health insurance area.

Other Benefits ... If You Pay
Retirement and health plans have been the only two areas of benefits that are widespread across the work force. Disability insurance, life insurance, flexible spending accounts and multiple voluntary individual sign-up benefits have never penetrated beyond one-third of the workforce. Many of these are now in decline, when considering what employers are paying for, as offer rates for voluntary employee-pay-all benefits are growing.

These dual trend lines of declining employer payment but increasing offers of worker-pay-all options are likely to continue, driven by inexpensive Internet administration. But compared to health and retirement benefits, no other employee benefit has been critical to broad-based worker recruitment and retention. About one-third of workers are willing to trade pay for more health insurance and far fewer are willing to allocate funds for other benefits, in the absence of at least partial employer funding.

Implications for the Future
Employment-based benefits system will continue for the foreseeable future to be the primary source of health and retirement coverage for the overwhelming majority of American workers and their families, as they are today. The design of employer programs will continue to be modified as objectives, preferences and technology continue to change.

It should not be forgotten that Medicare and Social Security benefits are currently employment-based systems: You get them as a result of working and paying payroll taxes. Proposals to shift them to full general revenue funding, a value-added tax or some non-payroll tax system have failed to gain widespread support.

This also means this system will continue to evolve as American employers are forced to keep adapting to a rapidly changing and globally competitive economy -- something their workers should understand and are certain to feel, whether or not they comprehend the forces at play.

Workers who are fortunate enough to be offered health and retirement coverage through their jobs can expect to be more involved in benefit decision-making and to share more of the cost of those benefits in the future.

Dallas Salisbury is president and CEO of the Employee Benefit Research Institute (EBRI), a private, nonprofit research institute based in Washington, DC, that focuses on health, savings, retirement, and economic security issues. EBRI does not lobby and does not take policy positions.